Bank of Melbourne

Morning Report

Main Themes: Stronger than expected US labour market data boosted US bond yields and the US dollar. The threat of additional tariffs on Chinese imports to the US weighed on equities.

Main Themes: Stronger than expected US labour market data boosted US bond yields and the US dollar. The threat of additional tariffs on Chinese imports to the US weighed on equities.

Share Markets: The US stockmarket weakened with Trump’s threat of additional tariffs on China weighing on the outlook for global economic growth. The Dow and the Nasdaq fell 0.3% and the S&P 500 lost 0.2% for the session.

Interest Rates: Bond yields jumped on the US employment and wages data, as investors ramped up their expectations of rate hikes from the Fed. The yield on the US 10-year government bond rose from 2.87% to 2.94%. The yield on the 2-year US government bond rose from 2.63% to 2.70%.  

Foreign Exchange: The US dollar was supported by the US labour market data and as concerns about additional tariffs on Chinese imports weighed on other currencies. The US dollar index (weighted against a basket of currencies) rose by 0.4% in Friday’s session. The US dollar gained versus the Euro and the Yen. Sterling gained earlier on conciliatory comments of Brexit negotiation from EU negotiator Barnier, however, it gave back those gains amid broad US dollar strength.

The Australian dollar weakened against the broadly stronger US dollar, with the threat of further US tariffs against China weighing particularly heavily on the local currency. AUD/USD fell to a low of 0.7097 earlier this morning. It was its lowest level since February 2016.

Australia: The AiG performance of construction index fell 0.2 points to 51.8 in August. Engineering construction is supporting activity, while sub-indices forconstruction in housing and apartments weakened. The commercial construction sub-index edged slightly higher, but continues to signal contraction.

The number of owner occupier loans rose 0.4% in July, but on an annual basis, was down 6.2%. It was the weakest annual pace in 16 months. The value of investor lending fell 1.3% in July, the fifth consecutive fall. The annual pace remained in decline, but eased from -18.1% to -15.7%.  Regulatory measures and tighter lending standards have continued to have a larger negative impact on investors relative to owner occupiers and first home buyers. Conditions in the housing market continue to soften, as reflected in declining housing lending, falling auction clearance rates and a slowdown in dwelling prices. Softness in the housing market is expected to continue, with further modest price declines likely. Strong population growth and a firm labour market are providing some support to the housing market, although it won’t be enough to halt the downturn in housing. 

China: China’s trade surplus widened to US$27.91bn in August, down from a surplus of US$28.05bn in July. The annual pace of exports growth eased to 9.8% in August, from 12.2% in July. The annual pace of imports growth felt o 20.0 in August, from 27.3% in July.  

China’s politically sensitive trade suplus with the US hit a record high of US31.05bn in August, from US$28.09bn in July.

Europe: German industrial production was weaker than expected, falling by 1.1% in July, after declining 0.7% in June. The annual pace of growth in industrial production eased to an increase of 1.1% in July, down from a rise of 2.7% in June.

The final reading on Eurozone GDP held at an increase of 0.4% in Q2, following a 0.4% increase in Q1. The annual pace of GDP growth eased to 2.1% for the final reading in Q2, from an earlier Q2 estimate of 2.2% and down from 2.4% in Q1.  

Japan: Japanesehousehold spending grew 0.1% in the year to July, which was stronger than expectations for a 0.9% decline. The tight labour market is beginning to support wages and spending.

United Kingdom: House prices rose 0.1% in August, after gaining 1.2% in July. The annual pace lifted to 3.7% in the three months to August, up from 3.3% in the three months to July.  

United States: Non-farm payrolls rose by 201k in August, after rising by 147k in July. It compared to consensus expectations for a 190k increase in August. The net revisions to the previous two months resulted in a 50k decline in payrolls. The unemployment rate held at 3.9% in August.

Average hourly earnings were a key focus of the release, with a larger than expected 0.4% increase in August. The annual pace of average hourly earnings growth lifted to 2.9% in August, from 2.7% in July. It was the fastest pace since 2009.

US President Trump warned of tariffs on another US$267 billion in Chinese imports, in addition to the US$200 billion of Chinese imports likely to have tariffs imposed “very soon”. Together with the US$50 billion of Chinese imports which have had a 25% tariff imposed, these additional amounts would cover almost all Chinese imports to the US.

The ISM non-manufacturing index rose to 58.5 in August, from 55.7 in July. The index is further above 50 signalling more rapid expansion in US non-manufacturing activity.

Factory orders were softer than expected, falling 0.8% in July, after rising by 0.6% in June.

Dallas Fed President Kaplan (a moderate hawk) said the Fed should continue to raise interest rates until mid-2019, before taking a decision on when to stop raising rates.

Cleveland Fed President Mester (a hawk) welcomed news of Friday night’s labour market data and said it “suggests this gradual raising of interest rates is appropriate for the economy.”


Today’s key data and events


AU RBA Assistant Governor Bullock Speaks

JN GDP Q2 final exp 0.7% prev 0.5% (9:50am)

CH CPI Aug y/y exp 2.1% prev 2.1% (11:30am)

CH PPI Aug y/y exp 4.0% prev 4.6% (11:30am)

UK  Trade Jul exp -£2.1bn prev -£1.9bn (6:30pm)

UK Industrial Prod’n Jul exp 0.2% prev 0.4% (6:30pm)

US Consumer Credit Jul exp US$14.1bn  prev US$10.2bn (5am)


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