Today’s podcast

https://soundcloud.com/user-291029717/the-kiwi-flies-powell-stands-still?in=user-291029717/sets/the-morning-call

Overview: Cold, cold water

• Trade deal optimism fades somewhat as the WSJ reports “talks hit snag over farm purchases”
• Fed’s Powell signals rates on hold, though little market impact given testimony was similar to the October FOMC presser
• NZD sustains yesterday’s 1.3% surge (now 0.6414) post the RBNZ holding rates against expectations of a cut
• FX otherwise little moved, while bonds rallied with US 10yr yields -6.8bps to 1.87%
• Coming up today: AU Employment, China activity data, GDP for Japan, Germany and EZ, Fed’s Powell (again)

In the words of Major Lazer’s 2016 hit “Cold Water”, markets had two does of “cold, cold water” with the RBNZ holding rates against markets pricing in an 80% chance of a cut, while optimism over an interim US-China trade deal has faded somewhat after a WSJ article reported “trade talks hit snag over farm purchases”. In terms of market moves, the NZD surged after the on hold RBNZ decision, with the Kiwi taking flight +1.3% and hitting a high of 0.6417. Those gains were sustained overnight with the NZD currently trading at 0.6414. Kiwi rates also saw sharp moves with 2yr swap rates up 15bps to 1.20%, while 10yr yields rose 9bps to 1.61%. Moves in other FX pairs in contrast were more moderate with the USD (DXY) unchanged at 98.35 with small declines in EUR (-0.1% to 1.1005) and GBP (-0.1% to 1.2842) offset by a moderate move lower in USD/JPY (-0.3% to 108.74). The AUD was also little moved (-0.2% to 0.6833), though the AUD/NZD cross has fallen -1.4% to 1.0655. Global yields have moved lower, though there was no clear catalyst apart from fading trade optimism with US 10yr yields -6.8bps to 1.87%.

First to the RBNZ decision

In what was a close decision, the RBNZ kept rates on hold at 1.0% with an easing bias (“further add monetary stimulus if economic developments warranted”). Emphasising how close the decision was RBNZ Governor Orr stated this morning that “it was without doubt a tough decision to hold rates”. With markets having gone into the meeting pricing in an 80% chance of a cut, there were sharp moves in FX (NZD +1.3%) and Rates (2yr swap +15bps). Also adding to the sustainability of the knee jerk reaction was some notion that the RBNZ could be on hold for a while with my kiwi colleagues at BNZ noting that the key to the RBNZ’s reluctance to reduce its cash rate stemmed from its revised view on the economy’s potential growth rate: the RBNZ’s potential growth rate track now troughs at 2.2% in 2021, which means that any growth in excess of 2.0% will likely start to see inflation rise. BNZ now sees rates remaining on hold at 1.0% for the foreseeable future, with the risk skewed to another cut if economic conditions materially weaken.

Trade optimism has also faded over the past 24 hours

Initially it was driven by President Trump’s remarks the day before yesterday who said “if we don’t make a deal, we’re going to substantially raise those tariffs”. Subsequently a WSJ article notes that “talks hit snag over farm purchases” with China reportedly cautious on “putting a numerical commitment [on farm buys] in the text of a potential agreement….Beijing wants to avoid cutting a deal that looks one-sided in Washington’s favour”, while Chinese officials have also resisted US demands for a strong enforcement mechanism for the deal and curbs on technology transfers for companies seeking to do business in China (see WSJ article for details).

The Fed’s Powell gave his usual testimony to Congress with remarks very similar to his October FOMC press conference. He noted again that he sees “the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with the outlook” and of course is ready to adjust policy if developments were to occur that caused a material reassessment of the outlook.

US data had little impact on markets with Headline CPI above expectations, but Core CPI at consensus. Headline came in one-tenth above consensus at 0.4% m/m against 0.3%, while core was in line at 0.2% m/m though it was a low 0.2 which saw the year-ended miss a tenth at 2.3% y/y. There were a whole host of volatile components with apparel prices falling sharply (-1.8% m/m) along with lodgings (-3.8% m/m), while there were strong increases for vehicles (+1.3% m/m), medical care serves and recreation services. Overall the data suggests core inflation in the US remains contained.

In rates

Global bonds rallied with US 10yr yields -6.8bps to 1.87%. Most of the move occurred as London opened with no specific catalyst apart from fading optimism around an interim US-China trade agreement. Equities also pared gains on the fading optimism with the S&P500 -0.1% to 3,089. Equities in Asia continue to be buffeted by unrest in Hong Kong with the Hang Seng -1.8%.

In Australia

An as expected wages print had little impact on markets with WPI at 0.5% q/q and 2.2% y/y. That pace of wages growth is in line with the RBA’s now downgraded wages outlook where the RBA forecasts wages growth stalls at 2.3% y/y until at least the end of 2021. Low wages growth likely reflects spare capacity, as well as notions of a global market for labour. It is also worth noting that wages growth of 2.2% is inconsistent with the RBA’s 2-3% inflation target – if it was than consumers would be having real wage cuts. Interestingly for businesses the data also hints that companies are tilting more remuneration towards bonuses (which can be varied with the fortunes of the business) with private wages including bonuses rising 3% in annual terms. Also out in Australia was the W-MI Consumer Confidence measure which rose 4.6% in November to 97.0. More interesting though was the unemployment expectation out of the survey which rose to its highest level since 2017 (see chart below).

Coming up

A very busy day ahead both domestically and internationally. Domestic focus will be on October Employment data. Focus then shifts to Chinese activity indicators and then to Europe for German Q3 GDP. In the US the Fed’s Powell is also speaking again along with seven other Fed officials.

• AU: RBA’s Bullock on Superannuation (9.50am AEDT): Unlikely to be market moving given Bullock on a panel with the Association of Superannuation Funds of Australia.
• JN: Japan Q3 GDP (8.50am local, 10.50am AEDT): GDP is expected to be 0.2% q/q, up slightly from last quarter’s growth of 0.3%.
• AU: Employment (11.30am AEDT): Consensus looks for Employment of +15k and for unchanged unemployment at 5.2%. While difficult to forecast, there is the potential for unemployment to tick higher and NAB pencils in an unemployment rate of 5.3%. Markets will be very sensitive given the RBA’s emphasis on achieving full employment which the RBA currently pegs at around 4.5%.
• CH: Industrial Production/Retail Sales/Investment (10.00am local, 1.00pm AEDT): More focus than usual is expected on industrial production given the weakness being seen in the industrial side of the economy. Consensus looks for Industrial Production to rise 5.4% y/y, a slightly lower pace of growth to the 5.8% recorded last month. In contrast retail sales growth is expected to be steady at 7.8% y/y along with Fixed Asset Investment at 5.4%.
• GR: German Q3 GDP (8.00am local, 6.00pm AEDT): All focus on whether Germany will have avoided a technical recession. Optics here are important, especially for those arguing the need for fiscal stimulus. The consensus looks for a very mild recession to have occurred at -0.1% q/q, following last quarter’s -0.1% q/q. Either way it is a close call and were a positive number to eventuate, the chances of fiscal stimulus is likely to be lower.
• UK: Retail Sales (9.30am local, 8.30pm AEDT): Unlikely to be market moving given the noise around the general election and Brexit. Core retail sales is expected to be +0.2% m/m and 3.4% y/y.
• EZ: Euro Area Q3 GDP (11.00am local, 9.00pm AEDT): Eurozone growth is expected to be similar to last quarter at 0.2% q/q and 1.1% y/y.
• US: PPI and Jobless Claims (8.30am local, 12.30am AEDT): Unlikely to be market moving. Consensus looks for Core PPI to bounce back +0.2% after last month’s surprise -0.3% decline. Jobless claims are expected to remain low at 215k.
• US: Fed’s Powell + 7 other Fed speakers: Chair Powell speaks before the House Budget Committee which is focusing on the economic outlook – note Powell is the first Fed chair to appear before this specific committee since 2012, though the remarks are likely to be similar to yesterday. There is also no less than seven other Fed speakers scheduled, though all are unlikely to be market moving given Fed speakers seem to be singing from the same hymn sheet of policy being mildly accommodative.
• Oil: OPEC oil market report released.

Market prices

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