HIGHLIGHTS – US University of Michigan provisional consumer confidence for June rebounded strongly…

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HIGHLIGHTS – US University of Michigan provisional consumer confidence for June rebounded strongly to 94.6 vs 90.7. – There were plenty of Greek headlines over the weekend, with a deal still no closer to being reached it appears. OUTLOOK UPCOMING TODAY: It is a relatively quiet day, with the only release being the Business NZ PSI for May (10:30am). CURRENCY: The USD will be the focus of the week, with the FOMC on Thursday. Tonight we look to the first of the June activity data. EUR will be a key focus, as Greek tensions continue.

RATES: Local yields are likely to open a touch higher. REVIEW CURRENCY: The USD found some strength against commodity currencies. NZD/USD posted a weekly close on a new big figure as we enter


the 0.60’s. GBP remained strong as normalisation approaches. GLOBAL MARKETS OVERVIEW: Greek tensions continued to bubble away (both on Friday and over the weekend), and while price action in FX markets was contained to relatively narrow ranges, the main action was in peripheral Eurozone bond markets, where spreads to bunds widened noticeably. European stocks also fell, and the DAX, CAC and IBEX 35 closed down 1.2%, 1.4% and 1.1% respectively). US equities also had a softer end to the week, with the main indices down 0.6-0.8%. US Treasury yields rose ahead of this week’s FOMC meeting (the 10 year yield rose 1.5bps). Commodity prices generally weakened and oil prices fell. ANZ’S ASSESSMENT NO GREECE ON THESE WHEELS. Despite another meeting in Brussels over the weekend, a deal on Greece is still no closer to being reached it appears.

The European Commission stated that "While some progress was made, the talks did not succeed as there remains a significant gap". That "gap" between the parties on fiscal measures supposedly is "in the order" of 2 billion euros annually. The upcoming Eurogroup meeting is now being proposed as the next opportunity for negotiations. Frustrations are clearly evident from all parties, but it is notable that there is now more chatter from creditors around the possibility of ‘Grexit’. European Commission President Juncker warned last week that the Eurogroup would start making preparations, while the German Vice Chancellor Gabriel has stated in a news article that "The shadow of a Greek exit from the euro zone is becoming increasingly perceptible." It would be prudent not to prepare for the worst of course. A LITTLE BIT BACKWARD (LOOKING). The main domestic data due this week (Q1 GDP and Balance of Payments) certainly feel historical now considering recent developments and the fireworks of last week in particular.

We expect modest GDP growth of 0.5% q/q, with drought impacted primary and goods-producing activity offset by another solid result from the services sector. GDP data is obviously important for firming views on economic momentum, and updating estimates of spare capacity. However, of more importance to markets should be more forward looking gauges, and it is here where we are detecting some softer signals. It is this softer tone to the economic data and the expectation of another benign Q2 CPI read that is the reason we expect the RBNZ to back up last week’s OCR cut with another next month. OVERNIGHT SPECIFICS AND KEY EVENTS – The provisional release of June US University of Michigan consumer confidence rebounded strongly, rising 3.9 points to 94.6. That probably reflected the rebound in NFPs recently but it clearly points to a reasonably optimistic consumer, as indicated by the strength in May retail sales (+1.2% m/m). Consumer surveyed inflation expectations were stable within their established range printing at 2.7% for the 1yr and 5-10yr outlook.

May headline producer prices rose 0.5% m/m as energy prices rose 5.9% m/m and food prices rose 0.8%. Core PPI rose a more subdued 0.1% m/m. – Euro area industrial production rose a disappointing 0.1% m/m in April against expectations of a 0.4% gain. That reflected the weakness noted earlier in the week which showed industrial production in France fell 0.4% m/m and in Italy by 0.3% m/m. The main weakness was in energy which dropped 1.6% in the month and non-durable consumer goods which fell 0.8% m/m. We know French production was disrupted by the temporary closure of a refinery that month, so expectations are for an improvement in the May data. Output of durable consumer goods rose by 1% m/m, capital goods by +0.7% m/m and intermediate goods by +0.3% implying that underlying upward momentum in the economy continues, albeit patchy – Hot on the heels of supposed comments from US President Obama on the strength of the US dollar (later denied), German Chancellor Merkel was reported to have stated on Friday that "too strong a euro makes reforms harder in Spain and Ireland." – There were plenty of Greek headlines over the past few days, although comments from Germany Vice Chancellor Gabriel certainly got some attention where he stated that "The shadow of a Greek exit from the euro zone is becoming increasingly perceptible" and "Greece’s game theorists are gambling the future of their country. And Europe’s too." – Global equities markets had a softer end to the week, with uncertainty surrounding Greek negotiations and also the upcoming FOMC meeting cited. Major US bourses closed down 0.6-0.8%, despite a more positive read on US consumer sentiment. European equities declined, with the Euro Stoxx 50 down 1.4% and major regional indices down by similar amounts. Greece stocks fell by close to 6%. – Greece uncertainty also impacted bond markets. While core European bond yields were broadly unchanged, peripheral 10-year spreads to bunds widened sharply (Italy +12bps, Spain +17bps, Portugal +19bps and Greece +57bps).

The yield on the US 10-year Treasury rose 1.5bps to 2.39%. – Commodity markets were weaker, with the broad CRB index down 0.8%. Falls were reasonably widespread, with energy (-1.6%) and livestock (-1.8%) leading the way. Oil prices were again weighed down by concerns that increased OPEC production will continue to contribute to a global supply glut. Prices for WTI and Brent fell 1.3% and 1.9% respectively. Gold prices were unchanged. NZD/USD: A WEEKLY CLOSE BELOW… The NZD/USD posted a weekly close below the psychological 0.70 value, which should see the importance of that level diminish. Strength from June US Michigan Confidence and a gasoline boost to US PPI ensure the USD trend remains entrenched in an FOMC week. We expect tonight’s June Empire survey and May industrial production data to continue to support the USD. Expected range: 0.6910 – 0.7030 NZD/AUD: NZD CENTRIC… The minutes of the RBA tomorrow are the main AUD release this week.

NZD drivers are the dairy auction and Thursday’s Q1 GDP. We expect NZD to remain under pressure this week. Expected range: 0.8980 – 0.9080 NZD/EUR: GREECE… Greek talks are entering the final stages, with the IMF payment due in a little over a fortnight. Headlines at the weekend were of the pessimistic variety putting EUR under pressure.

Draghi faces the EU parliamentary oversight committee on Economic and Monetary affairs tonight. Expected range: 0.6200 – 0.6300 NZD/JPY: BOJ WEEK… JPY traders will look forward to the BoJ meeting on Friday. After Governor Kuroda comments saw JPY strength, markets will be looking for clarification. Expected range: 85.80-86.80 NZD/GBP: FUNDAMENTALS… BoE MPC member McCafferty reiterated the time for normalisation approaches, while positive revisions to construction output belied the weaker headline. BoE minutes and UK employment should keep GBP strong. Expected range: 0.4450 – 0.4540


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