Markets like the HLFS and labour cost data; ECB not worried about deflation; Aussie data says China growing

by Kymberly Martin

NZ Dollar

Good morning all, an almost perfect scenario of a one day “working week” with the bonus it’s also a Friday. It’s one for the poets amongst you to enjoy especially if your “7’s” costume is sitting under your desk for changing into at lunch time.

Our interrupted week resumes with sentiment back in the control of the bulls & the hawks. Last week’s emerging markets roil and the decimation of equity indices long forgotten it seems with the world a much happier place this past week.

We open this morning to the NZDUSD in good heart, trading near 0.8275, a solid 2.5% climb from the lows at the start of the week. Local data in the form of labour market reports echoed the story of the wider economy.

Q4 employment, as per the Household Labour Force Survey (HLFS), expanded a seasonally adjusted 1.1%. This was all the more remarkable following the 1.2% jump in jobs in the previous September quarter, taking annual growth to 3.0%.Also, it seemed fair to say the HLFS employment growth was broadening across industries, regions and age groups, while the expansion was also fairly spread over full-time and part-time jobs.

It should be noted that the outcome was in line with what the market, ourselves and the RBNZ thought (as per its December MPS). On this basis the Bank won’t feel behind the curve in the slightest.

Nor will the Bank have perceived any inflation surprises in today’s wage and salary data. After digging deeper into the LCI data (and even with glance at the always-volatile QES wage and salary statistics) any concerns about rising inflation were also kept at bay.

So, when we look at the entirety of the labour market information, we’re left with the impression that while activity is clearly accelerating, it is not yet translating into inflation (partly because of rising population growth in tandem).

Many NZD cross rates are little changed though despite the favour afforded the Kiwi, note the specific strength afforded the EUR and the AUD (see Majors commentary). To see out the week, we would expect the NZD to find resistance on any probe towards the 0.8325/0.8350 level, while price action this week suggests ongoing support pegged on any retreat towards 0.8245/0.8255 in the first instance.

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Majors

Plenty to catch up on while we were off for the day, starting with Australian data released yesterday.

One factor helping the mood of markets & investors was a very good set of Australian trade numbers yesterday. While many people challenge the voracity of quality of Chinese economic data at times it has to be said the Australian Bureau of Statistics is held in high regard.

So, with just over a quarter of Australia’s total exports going to China and more than 70% of iron ore exports headed there, a look at Australian exports could be considered a decent medium-term proxy for Chinese industrial production. Yesterday’s data, and the ABS reported the trade balance for December was +$468m, after a revised surplus of $83m in November (previously -$118m).

These are the first trade surpluses recorded since December 2011.

Stronger exports did the trick here, up by 3.7% on the month while imports rose just 2%. Goods exports, mainly commodities, were up by a massive 4.6%.  Agricultural commodities rose by 17%, reflecting a 78% increase in grain exports, mainly wheat.  But there was also a surge in iron ore export volumes and prices, with quantities up by about 10% and prices up by around 7%.

The data encouraged the AUD to push towards the US90cent level and we open this morning at 0.8975. We now await todays QSMP for any pushback from the RBA on the recent recovery in AUD sentiment.

The BOE and ECB both left policy settings unchanged overnight, while for the latter it was left to Draghi to disappoint those looking for dovish commentary. In his post rate conference he promoted the view he was in no rush to cut rates, quashing speculation of a halt to the SMP sterilisation process while reiterating that there was no deflation in the Eurozone.

The EUR rallied sharply from below 1.3500 vs. the USD to above 1.3600 in vapid trade.

Across Europe equity indices have embraced the swing in sentiment, up more than 1.5% overall while Wall Street is good for 1% gains.

In the countdown to tonight’s key event, Non-farm Payrolls, markets had the ADP print 175k vs. expectations of 185k (with downward revisions to previous data). Last night saw Weekly Jobless Claims data print an improved 331k versus last week’s 351k while monthly trade data deteriorated to a deficit of US$38.7 bln clouding views on the second reading of Q4 GDP (due in 3 weeks).

All its research is available here.