Bank of Melbourne

Morning Report

Main Themes: Risk appetites lifted, with investors’ concerns somewhat assuaged as US officials downplayed the likelihood of action against Amazon. Fears remain, however, regarding a potential global trade war. The US stockmarket rebounded, US bond yields rose and the US dollar index gained ground.


Share Markets: The US stockmarket strengthened overnight. Amazon shares gained as nervousness about potential policy changes eased. Shares of automakers jumped on news of strong vehicle sales in March. The Dow rose by 1.7%, the S&P 500 gained 1.3% and the Nasdaq was up 1.0% for the session.

Interest Rates: Stockmarket gains dampened safe haven demand for government bonds, pushing yields higher. Solid investment-grade bond issuance also dimmed the focus on government bonds.

The yield on the US government 10-year bond rose from 2.73% to 2.78%. The yield on the US government 2-year bond rose from 2.25% to 2.28%.

Australian government bond yields (implied by futures) rose overnight.

Foreign Exchange:  The US dollar index (weighted against a basket of currencies) rose by 0.2% for the session. The Euro and the Yen weakened against the US dollar.

The rebound in risk appetites appeared to support the Australian dollar which edged up against the US dollar and strengthened against the other major currencies. AUD/USD rose to a high of 0.7707 yesterday and is trading around 0.7685 at the time of writing.

Commodities:  The oil price edged up US$0.50 to US$63.50 per barrel, only partly reversing the decline in the previous session.

Australia: The Reserve Bank (RBA) left the cash rate unchanged at 1.50% at its board meeting yesterday.

The accompanying statement remains cautiously optimistic about the economic outlook. However, the RBA suggests some risks are creeping in, especially in global financial markets. These risks relate to volatility and pressures on funding costs.

Funding costs have risen in the US and this has flowed on to Australia, but the RBA still highlights that financial conditions remain expansionary. The RBA highlights that short-term interest rates have increased as well as long-term bond yields.

On the domestic front, the text was very little changed from the last statement. There were three minor tweaks to the rhetoric on the domestic economy. These tweaks related to prices for Australian commodity exports, household consumption and the labour market.

We continue to expect the RBA to leave the cash rate on hold this year. Financial-market pricing has continued to move towards this view.

In terms of data, there was a further softening in dwelling prices in March, according to CoreLogic. The eight-capital cities combined index fell by 0.2% in the month, which represents the fifth consecutive monthly drop. A slowing trend has been evident since October 2017, mostly reflecting regulatory changes over last year.

In March, prices continued to decline in Sydney and Melbourne where investors have been most active and where price growth has been strongest over recent years.

Prices in Sydney are down 3.9% from their peak in July. It is a modest decline given strong growth in recent years. Melbourne dwelling prices are just 0.7% down from their peak.

We expect to see dwelling prices continue to moderate, but we do not expect large-scale price declines. Strong population growth and solid growth in employment in most capital cities should continue to be supportive of housing demand.

China: Despite the lift in investor sentiment overnight, concerns about a potential trade war continue. China’s ambassador to Washington, Cui Tiankai, indicated yesterday that China will take counter-measures of the “same proportion” and scale if the US imposes further tariffs on Chinese goods.

Europe: The final reading on the Markit manufacturing PMI held at 56.6, unchanged from an earlier estimate for March. It has declined in recent months, however, with the most recent reading for February at 58.6. The index remains well above 50 signalling ongoing expansion in European manufacturing activity.

United Kingdom:  The Markit manufacturing PMI edged up to 55.1 in March, from 55.0 in February. It also remains well above 50 indicating UK manufacturing activity is expanding.

United States: The New York Fed named John Williams to be its next president, succeeding William Dudley. Williams is currently the San Francisco Fed president.  The New York Fed president is a permanent voter on the FOMC interest-rate decisions (rather than rotating) and is traditionally the vice chair of the FOMC. Williams is seen as a moderate to slightly hawkish Fed FOMC member and has indicated three to four rate hikes for this year would be appropriate.

There was no significant economic data released in the US overnight. Investors await Friday’s nonfarm payrolls and average hourly earnings numbers.

Today’s key data and events

NZ Consumer Confidence Mar prev 127.7 (8am)

AU Building Approvals Feb exp -5.0% prev 17.1% (11:30am)

AU Retail Sales Feb exp 0.3% prev 0.1% (11:30am)

CH Caixin Composite PMI Mar prev 53.3 (11:45am)

CH Caixin Services PMI Mar exp 54.5 prev 54.2 (11:45am)

EZ Unemployment Rate Feb exp 8.5% prev 8.6% (7pm)

EZ Core CPI Mar y/y exp 1.1% prev 1.0% (7pm)

US ADP Employment Change Mar exp 210k prev 235k (10:15pm)

US ISM Non Mfg Index Mar exp 59.0 prev 59.5 (12am)

US Factory Orders Feb exp 1.7% prev -1.4% (12am)

US Durable Goods Orders Feb Final prev 3.1% (12am)


Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.


Jo Horton, Senior Economist