Recent optimism on a Greek deal has sobered; surprise in further trimming of Fonterra milk price; US$ finds some friends and Kiwi trades to 2015 lows

By BNZ Economists

Open the usual financial media this morning and it is a case of “pick your poison” over the morning cuppa.

Headlines from Europe are shared evenly between Athens and Zurich. The latter has no markets impact, but the former is obviously of ongoing concern ahead of G7 ministers gathering in Dresden. Lagarde, of the IMF, quoted as saying that a Greek exit was now a “possibility “.

Four months of talks seem no closer to a resolution. She suggested recent optimism on a deal had sobered.

On the home front the media focus is the update from Fonterra of yesterday. There was the surprise of a further trimming to the current season payout as well as their first call on the 2015/16 season.

The announcement was arguably at the strong end of unofficial market expectations, however, that is all relative to low expectations and a poor current season. All of this will only turn the screws on an already poor cash-flow outlook for the coming months. Analysts also note that the advance payment rate, of $3.66, also affirms the tight cash-flow story for the industry outlook.

Our own forecasts and those of Fonterra are of course predicated on an expectation of commodity prices recovering going forward, reliant on a cyclical rebound in international prices and a continued softening of the NZD.

Yesterday saw attention on a weak outcome for Australian Capex (Q1 reporting). March quarter new Private Capital Expenditure fell by 4.4%, much weaker than analysts picks for a number starting with a -2.

Our NAB colleagues wrote that this is obviously at face value a weak result. Though they note that the mining aspect is well anticipated and the non-mining estimate could be subject to normal volatility in survey data. They add that to an extent, the RBA has pre-empted this result by its business liaison programme and easing policy twice recently, so the outcome holds few immediate implications for monetary policy.

Overnight the US$ has continued to find favour, especially against the commodity currencies. The NZD trading to fresh 2015 lows against the greenback below 0.7150 and not surprisingly the AUD is also under renewed pressure after the Capex numbers.

The GBP took centre stage overnight thanks to a Q1 GDP reading that was a touch weaker than expectations. UK preliminary Q1 GDP came in at +0.3% - unchanged and against a consensus +0.4%, with softer services and consumption growth. The outturn will disappoint the BoE which had recently forecast a rebound to +0.5% q/q.

The US had a light economic calendar with weekly Jobless Claims climbing to 282k versus expectations for 270k. Pending Home Sales data improved notably, the monthly print of +3.4% outstripping expectations and keeping the YOY rate at 13.4%.

Fed voter Williams (hawkish end of FOMC) said the Fed was likely to raise rates later this year and gradually over the next few years – a message consistent with other Fed rhetoric that a hike is coming.

So on we go to the day ahead and of course the bliss of a long weekend to look forward to, (many happy returns Liz). Further data for the local analysts to consider with the release of the NZ business surveys the primary focus. We really need to start this cooling a bit, to be consistent with the GDP slowdown we forecast for this year.

We get the ANZ survey at 1:00pm. Its previous edition had net confidence at a solid 30.2 and own-activity expectations up at 41.3. Most attention, however, will probably be on the inflation gauges, given the RBNZs’ worry the current phase of low inflation is getting embedded in expectations. In April, pricing intentions were middling at +23.1 and inflation expectations were at 1.76%.

First up today though is building consent figures which should hopefully hang on to the good bounce they registered in March, largely on the residential side. The headline results are always prone to whip around month-to-month. To see out the week the release of credit aggregates which are likely to maintain their recent momentum, with reference to the March outcomes of household, business and agriculture credit posting firm annual expansion of 5.0%, 7.3% and 6.0% respectively.

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