US services strong, factories less so; Greece burns off support, changes negotiators; Australia warned on credit rating risk; NZ$1 = 76.4 US¢, TWI = 80.7

US services strong, factories less so; Greece burns off support, changes negotiators; Australia warned on credit rating risk; NZ$1 = 76.4 US¢, TWI = 80.7

Here's my summary of the key issues from over the long weekend that affect New Zealand, with news of concerns over Australia's credit rating.

But first, the April PMI reading for the giant American service sector remains very positive showing it expanding in a healthy manner. Business activity and incoming new work are both increasing at strong rates in April. In fact, the survey recorded the sharpest rise in service sector payroll numbers since June 2014. It also recorded that cost inflation rose to a six-month high.

The Fed will notice, although it will meet later in the week, and after that release its own preferred measure of inflation in the USA economy. And economists only see a very modest rise for that index.

Over in the US manufacturing sector, purchases of US durable goods jumped by +4% in March, the largest gain in eight months. This comes after this same data slipped by -1.4% in February. But a closer look at the March detail reveals that businesses kept pruning their investment plans. The result was led by a big jump in demand for commercial aircraft. Outside of that however, factory orders fell for a sixth straight month.

In Europe, the weekend negotiations between the EU and Greece were a disaster for Greece; they managed to burn off any sympathy they had and left the EU fuming at the intransigence and lack of reform progress. This morning, the Greek government announced it had changed its negotiating team, removing their lightening-rod finance minister away from the front line. It is too early to know whether this represents a change of heart by Athens or is just a stalling tactic.

In Australia, the warnings over the consequences of a coming sovereign credit rating downgrade and subsequent downgrades to bank credit ratings are growing louder. Should these occur, that will raise the cost of funding for those banks and that will flow over to our main banks.

Back in New York, the UST 10yr benchmark yield is marginally lower today at 1.93%. But the New Zealand swap curves are definitely steepening, at their strongest slope in six weeks.

The US oil price remains at about US$57/barrel, while Brent crude is up to US$65/barrel in trading earlier today, mainly on expected rising international demand.

The gold price has shot higher overnight and now trades at US$1,205/oz. At one point yesterday it had fallen to US$1,175, so that is a $30 gain in 24 hours.

After a brief dip over the weekend, the New Zealand dollar starts today rising, although a little lower than where we left it on Friday. It is at 76.4 US¢, at 97.3 AU¢, and 70.2 euro cents. But the TWI is still very elevated at 80.7.

If you want to catch up with all the local changes on Friday, we have an update here.

The easiest place to stay up with event risk is by following our Economic Calendar here »

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6 Comments

Westpac sees a 40% chance of an OCR cut by year end. Other banks say a cut more likely than a hike.
Very dovish for that commentary stream.

I can't see them changing it, damned if you do, damned if you don't. The last cut was in '11 when Chch had a major shake up, and we came close to a recession. The banks may like a cut, but outside of a recession (which is IMO getting more likely every day) where is the mandate to cut?

A simple fact, NZ debt has been growing faster then GDP for decades, interest rates have to trend down in that kind of environment.

The Fed will notice, although it will meet later in the week, and after that release its own preferred measure of inflation in the USA economy. And economists only see a very modest rise for that index.

hmmm - follow the money protagonists have a different outlook.

Investors have also purchased 72 percent of the TIPS auctioned by the Treasury Department this year, the greatest proportion since at least 2003.

Increased demand for inflation protection has coincided with an upturn in the bond market’s expectations for how much consumer prices will rise in coming years. Faster inflation erodes the buying power of fixed-rate payments of bonds.

Based on a metric known as the break-even rate, traders see inflation averaging 1.71 percent a year in the next half-decade. That’s a half-percentage point higher than at the end of 2014 and the biggest jump over a comparable period in four years.
“Headwinds on inflation are abating,” said Michael Pond, the head of inflation-linked research at Barclays in New York.
Read more

In Australia, the warnings over the consequences of a coming sovereign credit rating downgrade and subsequent downgrades to bank credit ratings are growing louder. Should these occur, that will raise the cost of funding for those banks and that will flow over to our main banks.

Bloomberg headlines such as, "Australia Blowing $1 Trillion Export Windfall Boosts Budget Pain", adds to the clamour for a downgrade - johnny foreigner wholesale lender wants his money back in the form of increased loan returns.

"The United States is poised to flood world markets with once-unthinkable quantities of liquefied natural gas as soon as this year, profoundly changing the geo-politics of global energy and posing a major threat to Russian gas dominance in Europe.

Ryan Lance, head of ConocoPhillips, said North American oil output could reach 15m b/d by 2020 and 25m b/d over the next quarter century, three times Saudi Arabia's current exports."

http://www.telegraph.co.uk/finance/newsbysector/energy/11563761/US-to-la...

Increase in extreme weather events already here:

http://www.theguardian.com/environment/2015/apr/27/extreme-weather-alrea...

Extreme heatwaves and heavy rain storms are already happening with increasing regularity worldwide because of manmade climate change, according to new research.

Global warming over the last century means heat extremes that previously only occurred once every 1,000 days are happening four to five times more often, the study published in Nature Climate Change said.

It found that one in five extreme rain events experienced globally are a result of the 0.85C global rise in temperatre since the Industrial Revolution, as power plants, factories and cars continue to pump out greenhouse gas emissions.

“A lot of us and our colleagues were surprised by how high these numbers are already now in the present day climate,” said Dr Erich Markus Fischer from the Swiss Federal Institute of Technology.

Can't really see how this presents 'opportunities' for New Zealand but no doubt someone will try to phrase it that way.....