August 5, 2015

Markets Today: Why not rather than why

Much of yesterday and the overnight sessions were characterised by relatively quiet moves, with bursts of activity.

Much of yesterday and the overnight sessions were characterised by relatively quiet moves, with bursts of activity. Events have caused localised sharp moves in markets, but the broader drift has been consistent with a move towards pricing for a Fed hike: slightly lower equities, higher yields, a modest pick-up in commodity prices and a stronger USD. The AUD outperformed.

The abysmal NZ dairy auction recorded the 10th consecutive decline in dairy prices, (-9.3%) leaving them down 47% since March. That doesn’t bode well for the farmer’s payouts from Fonterra and leaves sentiment in the NZD poor. It isn’t new news though, just adds to the disappointment.

Given this, it wasn’t until some Fed speak that the NZ currency (and everything else) reacted. The Fed’s Lockhart, generally known to be a centrist voter, was fairy specific in saying to the WSJ that he needs to see a ‘significant deterioration” in the data in order NOT to vote to raise rates in September. That forms a change from the market believing that the Fed needs to see better data to support a hike this year. So it appears at least one voter is on track to hike at the next meeting and needs to see reasons why not, instead of why in order to do so.

It also comes on the back of the Fed’s Bullard on Friday who was supportive of raising rates. With the market not fully priced for September, these comments generated a step up in the USD modestly across the board and a rise in yields.

The RBA’s change in language on the currency was one of the most interesting parts of the statement yesterday, with the Bank foregoing the “further (AUD) depreciation is likely and necessary,” in favour of the currency is “adjusting to the significant decline in key commodity prices.” This reflects the July sell-off in the currency; but given the extended short positioning in the market, it was not a huge surprise to see AUD sharply higher post the statement.

The stronger than expected retail sales also helped provide a more positive spin to local markets through the day.

Coming Up

It’s global trade data day. Ok, Australia released its numbers yesterday and maintained its very large deficit (China is Saturday). But global trade data has somewhat reflected the soft global demand, the decline in commodity prices and the changing currency trends over recent years. If the US and Canada show weaker than expected exports, or imports as well in the case of the US, there is likely to remain a slightly dour mood in relation to global demand.

But, markets are likely to pay more attention to the US’s ADP payrolls release. Given the US payrolls (Friday) is such a volatile series, the partial indicators attempting to shed some light on the ‘official’ outcome gather more attention. We know that the ADP isn’t a great precursor to the payrolls number, but with the FOMC so very focussed on the next key official employment results, there might be an over-reaction to any miss in the results tonight. Note that our analysis of market reactions to data show that the US payrolls typically generate a top five (annual average) AUD reaction to data releases. With these releases being so important to the FOMC, and a hike partially priced for September, expect an outsized reaction.

The services PMIs are released in the US, Europe, UK and China and may also get some attention, but the manufacturing ones continue to remain the more important for markets; despite services performing mostly better.

This morning we get NZ employment data. With the poor dairy numbers and the NZD under pressure, it is likely that the risk for markets is a better than expected outcome.


On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years +7.51bp to 2.22%. On commodity markets, Brent crude oil +1.25% to $50.14, gold-0.2% to $1,087, iron ore -0.6% to $55.29. AUD is at 0.738 and the range was 0.7264 to 0.7429.

  • Fed’s Lockhart notes that he is looking to raise interest rates in September.
  • NZ dairy price auction -9.3%

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