06/09/2015
Australia & NZ Morning Thoughts.
Imre Speizer
The eagerly awaited US payrolls report was strong enough to tip the scales towards a Fed rate hike later this month, and consequently dented risk appetite. The S&P500 closed down 1.5%, the CRB commodities index fell 0.9%, and AUD and NZD performed poorly.
12:20PM, 06 Sep 2015
Market Wrap
Global market sentiment: The eagerly awaited US payrolls report was strong enough to tip the scales towards a Fed rate hike later this month, and consequently dented risk appetite. The S&P500 closed down 1.5%, the CRB commodities index fell 0.9%, and AUD and NZD performed poorly.
Interest rates: US 2yr treasury yields jumped from 0.68% to 0.73% following the payrolls report but later settled around 0.70%. 10yr yields initially rose from 2.12% to 2.17% but closed unchanged.
Fed hawk Lacker thought the US jobs report was good and the Fed needs to hike rates.
Fed fund rate futures pricing initially jumped from a 30% chance of a rate hike to 40% but retraced to close unchanged. October remains a 50% chance, while February 2016 is a 100% chance.
Australian 3yr government bond yields (futures) rose from 1.74% to 1.76% while the 10yr yield fell from 2.68% to 2.64%.
Currencies: The US dollar index closed modestly lower on the day, but still near a two-week high. EUR knee-jerked lower after the payrolls report but remained inside the day’s 1.1090-1.1189 sideways range. USD/JPY made a two-week low of 118.61 post payrolls. AUD fell from 0.6988 to 0.6908 – a six-year low. NZD performed even worse, falling from 0.6380 to 0.6272. AUD/NZD rose from 1.0950 to 1.1028.
The weekly CFTC positioning report showed US dollar index longs were reduced, EUR shorts were increased slightly, AUD shorts were reduced, and NZD shorts were increased for the first time since mid-July. US 10yr treasury note shorts were increased slightly.
Economic Wrap
US payrolls rose 173k in August, lower than the 217k expected although upward revisions for June and July were worth 44k so that consensus was arguably met.
Many were braced for a weak number given August is seasonally notorious for initially undershooting before being later revisions higher. The 3, 6 and 12 month moving averages all held above 200k for yet another month at 221k, 205k and 243k. Average hourly earnings rose 0.3%, more than expected, and the unemployment rate slipped to 5.1% (lowest since mid-2008) vs 5.1% expected. Rounding out the better detail, total weekly hours worked were higher than expected, the employment to population ratio rose and U-6 - the broader measure of unemployment - fell 0.1ppts again to 10.3%.
However, the participation rate was flat and the fall in the unemployment rate was attributable to a small shrinkage in the labour force in August. The participation rate has been flat now for three months and seems stuck at almost 40yr lows.
That aside the overall tone of this report "ticks the jobs box" for the Fed, meeting their requirement for "some further improvement in the labour market". From here there is no one make or break factor to solidify the 17 Sep decision and that is very much about market conditions going into the hike. Stable markets should tip the balance in favour of a hike but rough sailing between now and 17 Sep will see the Fed on hold.
Market Outlooks
Event risk today: There’s little to ruffle markets today. Australia has a construction sector survey, Germany has industrial production, and there’s a Eurozone investor sentiment survey.
AUD/USD 1 day: Broke below a multi-month descending range on Friday and should now be capped at 0.7000.
AUD/USD 1-3 month: Eventual resumption of the strong US dollar trend should weigh on the AUD during the next few months. The next major downside target below 0.7000 is 0.6700.
NZD/USD 1 day: Broke lower on Friday and should now head towards the 0.6200 level during the week.
NZD/USD 1-3 month: We look to our next major downside target at 0.6200 which was a low in July 2009. The two main factors expected to contribute to NZD/USD weakness during the next few months are RBNZ easing (we expect the OCR to fall to 2.00% by early next year) and Fed tightening (FF mid-point to rise by 25bp in September).
AUD/NZD 1 day: The 1.0950 level is providing a decent support. The multi-month contracting range has boundaries at 1.0950-1.1250 currently.
AUD/NZD 1-3 month: The RBA will probably remain on hold (albeit with easing risk), while the RBNZ is currently in easing mode. Expected RBA vs RBNZ direction thus favours AUD/NZD over the medium term. The next major target is 1.1580.
AU swap yields 1 day: The 2yr should open around 1.94% while the 10yr should open around 2.96%.
AU swap yields 1-3 month: The 2yr has broken below its multi-month range of 2.00%-2.20% and targets 1.85%. The 10yr continues to follow the US 10yr lower and next targets the 2.60% area.
NZ swap yields 1 day: NZ 2yr swap rates should open up 1bp at 2.80%, while the 10yr should open down 1bp at 3.59%.
NZ swap yields 1-3 month: Short maturity NZ interest rates should fall further during the next few months. The RBNZ should deliver another 25bp at the September meeting and signal even more after that. We thus target a 2yr swap rate of 2.65% during the next few months. The 10yr yield will be partly influenced by the RBNZ’s easing cycle but will also be hostage to expectations Fed policy will tighten in September. We target 3.70%.
