Bank of Melbourne

Morning Report

Main Themes: Risk sentiment deteriorated in the European session on anti-Euro comments from Italian coalition budget committee member Borghi. Sentiment subsequently lifted in the US session, partially reversing the European-session decline, on comments from Fed Chair Powell. Powell reiterated that he expects further gradual tightening of monetary policy.
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Share Markets: The US stockmarket had a mixed session. The Dow rose 0.5% to a record closing high. The S&P 500 was unchanged and the Nasdaq fell 0.5%. Facebook continued to decline following disclosure of a security breach on Friday.

Interest Rates: US bond yields fell overnight as risk aversion encouraged safe haven flows into government bonds. The decline in yields was sharper earlier in the session, although some of that was reversed as risk sentiment improved. The prospect of heavy US corporate debt issuance also supported US bond yields. The yield on the US government 10-year bond fell from 3.08% to 3.06%. The yield on the US government 2-year government bond fell from 2.82% to 2.81%.

In Europe, German bond yields fell amid safe haven flows, as Italian bond yields jumped.

Foreign Exchange: The US dollar index (weighted against a basket of currencies) rose 0.2% from yesterday morning as risk aversion boosted its appeal.

The Euro declined on anti-Euro rhetoric from Italy, although it retraced some of that decline later in the session on reassuring comments from Italian officials. Brexit concerns weighed on Sterling, while the Yen strengthened on safe have flows.

The Australian dollar fell on risk aversion and failed to fully recover that decline. AUD/USD fell from a high of 0.7238 yesterday afternoon, to a low of 0.7162. AUD/USD is trading around 0.7190 at the time of writing. The Australian dollar lost ground against the New Zealand dollar.

Commodities: The oil price held its ground, following a strong rise in the previous session.

Australia: The Reserve Bank of Australia (RBA) continued to leave the official cash rate on hold at 1.50% as widely expected at its October meeting. On the domestic front in its commentary the RBA remained optimistic on the labour market. There were however, some subtle shifts towards more hawkish commentary, in spite of ongoing global trade tensions.

The RBA continued to acknowledge that the “ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States”, unchanged from commentary in September. However, there was a hint of higher global inflation risks. The RBA notes that “globally inflation remains low”, but pointed to an increase due to higher oil prices and “some lift in wage growth”. Moreover, “a further pick-up in inflation is expected given the tight labour markets, and in the United States, the sizeable fiscal stimulus”.

In a report yesterday, the Department of Industry said it expects resource and energy exports to hit a record high of $252 billion in 2018-19, supported by higher prices and a weaker Australian dollar. In 2019-20, it expects the value of resource and energy exports to edged down to $238 billion, despite a rise in volumes, as increased global supply weighs on prices.

Europe: Anti-Euro comments from Italy weighed on investor sentiment overnight. Italian coalition budget committee member Borghisaid “I’m truly convinced that Italy would solve most of its problems if it had its own currency.”

Producer prices rose by 0.3% in August. This followed an increase of 0.7% in July (previously reported as a 0.4% rise). Annual growth in producer prices eased to 4.2% in August, from 4.3% in July.

New Zealand: House prices rose by 4.6% in the year to September, according to QV. This pace represents a slight slowdown from the 4.8% annual growth rate recorded in the previous month.

United Kingdom: House prices lifted 0.3% in September, after declining 0.5% in August, according to the Nationwide measure. Annual house price growth was steady at 2.0% in September.

United States: In a speech overnight Fed Chair Powell said the outlook is “remarkable positive” and that we remain in “extraordinary times” with ultra-low unemployment and tame prices for the foreseeable future.

Dallas Fed President Kaplan said he expects one more rate hike this year and two more next year. He said “we’ll have to see if it’s appropriate to do more. I’ll make that judgement as we go.”He said he is not advocating a pause in rate hikes as the Fed moves towards a neutral stance.

 

Today’s key data and events:

AU AiG Perf. of Services Index Sep prev (8:30am)

AU Building Appr. Aug exp 1.0% prev -5.2% (11:30am)

UK Markit Serv. PMI Sep exp 54.0 prev 54.3 (6:30pm)

UK Composite PMI exp 53.9 prev 54.2  (6:30pm)

EZ Retail Sales Aug exp 0.2% prev -0.2% (7pm)

US ADP Employ. Sep exp 184k prev 163k (10:15pm)

US ISM Non Mfg Index Sep exp 58.0 prev 58.5 (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
Ph:02-8253-6696