ANZ Morning Brief 01.09.2010

There is unlikely to be any spring in the NZD step today as it remains on the back foot after yesterday’s developments, said ANZ National Bank this morning. “Trans Tasman support may cushion some of the downside pressures during today.”

ANZ senior markets economist Khoon Goh says the NZ rates market is expected to open slightly lower in yield today, and the bias to still remain toward the receive side during today’s trading.

He says, “NZD support levels were all eliminated as offshore markets failed to grasp the benefits of NZ Government intervention to the wider economy.  Overnight, offshore markets thrashed around in similar vane.

“Following weakness in Asian equities, the US market opened lower but managed to move into positive territory on the back of some better economic data,” says Goh.  “However, US equities dipped back into the red late in the trading session, weighed down by tech and energy stocks.  US bond prices continued to rise as investors remain concerned about the economic outlook, which also weighed on oil prices.”  

ANZ’s KEY THEMES AND VIEWS

FED NAVIGATING THROUGH DIFFICULT BALANCING ACT.  Goh says the release of the FOMC minutes from their August meeting, in which they decided to reinvest the principal repayments received on MBS and maturing agency debt into US Treasuries, was much anticipated. 

“Reading through the minutes, it is clear that the decision to reinvest is partly because the Fed was facing accelerated MBS repayments because of increased mortgage refinancing, and to allow the Fed’s balance sheet to shrink risks sending longer-term interest rates higher – though there was uncertainty over how much.” 

Goh says there was clearly concern that the decision to maintain the size of the Fed’s balance sheet could send the wrong signal to the market.  “While the FOMC is certainly prepared to provide additional support to the economy, the hurdle still looks high at this stage, and the outlook would need to “weaken appreciably further”. 

“Quite how much is anyone’s guess at this stage,” says Goh.  “The economic data out overnight (house prices, consumer confidence) was better than expected, which is quite a nice change after a string of disappointments. 

“But it is the ISM and payrolls data later this week that will provide the real reads on the extent of the slowdown.  There is clearly a difficult balancing act that the FOMC faces in trying to establish just where the US economy is heading, not over-reacting to the near term dataflow, and yet trying not to disappoint the market at the same time.” 

Goh says that with each successive data showing a slowing in US growth, there will be more calls for the Fed to expand their quantitative easing programme, but the minutes clearly show the FOMC are not there yet. 

Courtesy ANZ.

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