Bank of Melbourne

Morning Report

Main Themes: US share markets ended overnight weaker, the US dollar slightly stronger and US bond yields slightly higher. Meanwhile, oil continued its march higher.

Main Themes: US share markets ended overnight weaker, the US dollar slightly stronger and US bond yields slightly higher. Meanwhile, oil continued its march higher.

Share Markets: US share markets finished the session lower, after a back-and-forth session. Investors were unnerved after US President Trump raised doubts about the outcome of talks between his trade representatives and China’s negotiator. The Dow Jones closed down 55 points (or 0.2%) and the S&P 500 index finished 2 points lower (or 0.1%).

Interest Rates: The US 10-year treasury yield rose from 3.10% to 3.12%, which is a fresh high since 2011. US 2-year yields rose by 1bp to 2.60% - the highest since 2008 – before slipping to 2.56%. Fed fund futures yields predict a rate hike in June (100% chance) with another to follow before the end of this year.

Foreign Exchange: The USD index is up slightly overnight, hovering around its five-month high. EUR/USD ranged between 1.1775 and 1.1840. USD/JPY rose from 110.20 to 110.86 – the highest since January. AUD/USD fell from 0.7548 to 0.7498. NZD/USD fell from 0.6938 to 0.6873. Yesterday’s NZ Budget did not have any significant impact on the currency. AUD/NZD rose from 1.0900 to 1.0940, before settling around 1.0920.

Commodities: Brent oil surged to US$80 a barrel during London trade overnight. Brent is trading at a large premium to West Texas Intermediate. The latter quote stayed steady overnight. Oil prices are being underpinned by mounting signs that global stockpiles are falling.

Australia: Jobs grew 22.6k in April, close to expectations. Nonetheless, April’s job gain comes off the back of weakness over February and March, when jobs declined 7.4k and -0.7k, respectively.

Average monthly job gains over 2018 stood at just 13.2k, far below the average monthly gain of 34.6k over 2017. A slower pace of job growth has taken hold since the beginning of the year, although it in part reflects some payback for last year’s strength.

The unemployment rate edged up from 5.5% in March to 5.6% in April. After back revisions, it was the highest in nine months. However, this was mostly as a result of more people entering the workforce. The participation rate lifted from 65.5% in March to 65.6% in April, close to a record high.

The slower pace of employment growth since the turn of the year raises doubts as to whether sufficient spare capacity in the labour market will be absorbed for a meaningful lift in wages and inflation.

We expect that jobs will continue to grow sufficiently for some reduction in the unemployment rate. The upswing in the global economy, buoyant business conditions and the pace of domestic demand points to a relatively healthy rate of job growth. That said, we are far from hitting a 5.0% unemployment rate, the RBA’s estimate of the jobless rate at full employment.

Eurozone: Construction output fell by 0.5% in March, which was more than anticipated. There was a further downgrade to February (-0.7% m/m from -0.5% m/m) in yet another show of weaker 1Q activity.

Italy’s 5 Star and Lega agreed on their main policies, moving closer to forming a coalition. Individual party members should vote on the agreement tomorrow and a coalition could be affirmed by President Mattarella early next week.

New Zealand: The Budget was handed down yesterday. The government's projected surplus has risen to $NZ3.1 billion for this financial year and is forecast to rise to $NZ3.7 billion in 2018-19 and to $NZ7.3 billion by 2021-22.

The economy has proved stronger than expected, providing more tax revenue than forecast. Much of the extra money was channelled into health. The Government stuck to its self-imposed Budget Responsibility rules, including the net debt target.

The ramp up in spending in this Budget will have inflationary consequences for the economy. Treasury thought these would be significant, and forecast official cash rate (OCR) hikes early next year.

A previously forecast 3.6% growth rate for 2018-19 has been cut to 3.3%, but growth is expected to average about 3% to 2022, with unemployment to flatten to 4.1%.

United States: Initial jobless claims rose by 11,000 claims in the latest week, leaving the total of 222K at a historically healthy level.

The Philadelphia Fed business survey rose from 23.2 in April to a cyclical high of 34.4 in May. Most of the sub components were stronger in this survey. Prices received were notably stronger, and both employment (30.2 in May from 27.1 in April) and the workweek (34.4 in May from. 21.6 in April) showed a decidedly firmer outlook for the labour market than a few months ago.

Speeches from the US Federal Reserve included Kashkari (dove) who said low wages growth is a conundrum; and Kaplan (centrist/hawk) who said the economy is at or past full employment.


Today’s key data and events

JN CPI Apr y/y exp 0.7% prev 1.1% (9:30am)

EZ Trade Balance Mar exp €21.0 prev €21.0 (7pm)


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.


Besa Deda, Chief Economist