Bank of Melbourne

Morning Report

Main Themes: Volatility in financial markets jumped, as equities tumbled and US long-term bond yields pushed higher.
Share

Main Themes: Volatility in financial markets jumped, as equities tumbled and US long-term bond yields pushed higher.

Share Markets: US share marketed were battered overnight with technology stocks among the hardest hit. Investor sentiment was hurt by worries about rising bond yields. Media reports that China infiltrated US businesses by implanting tiny chips in servers used by companies and the government also hurt sentiment. The Dow Jones fell 201 points (or -0.8%) and the S&P 500 index dropped 24 points (or -0.8%).

Interest Rates: US Treasury yields extended the previous day’s surge, despite the sell-off in equities. Recent comments from top Federal Reserve officials also stoked yields higher. The US 10-year yield pushed up to 3.23%, which is the highest since May 2011, before consolidating its rise. The US 2-year yield also rose during trade but finished flat at the close. Federal fun futures yields continued to price the chance of another rate hike in December at 80%.

Foreign Exchange: AUD/USD extended the day’s decline from 0.7100 to 0.7066 – the lowest since February 2016.

The US dollar index consolidated overnight, staying near an eleven-month high. EUR/USD bounced off a two month low of 1.1464 to 1.1543. The defensive yen outperformed, USD/JPY retreating from 114.40 to 113.65. The underperformer was NZD; it extended lower to 0.6474 – the lowest since January 2016. AUD/NZD remained stuck in its sideways ranging pattern, between 1.0900 and 1.0920.

Commodities: Commodity prices, including oil and copper, tumbled overnight. However, the price of gold remained stable.

Australia: Australia’s trade surplus lifted marginally to $1,604 million in August after posting a $1,548 million surplus in July. It was the eighth consecutive month of surpluses. The ongoing momentum in the global economy is supporting export growth. In August, exports grew 0.5% for a solid annual pace of 15.3%. It was the strongest annual rate in a year. Imports rose 0.4%, for annual growth of 12.0% and are being boosted by solid domestic demand.

United States: Factory goods orders surged 2.3%, the largest increase since September 2017, boosted by a lift in aircraft orders, after falling 0.5% in July. Orders increased 8.6% on a year-on-year basis in August.

Initial jobless claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 207,000 for the week ended September 29. That reversed the bulk of the increase from the prior week when claims were boosted by Hurricane Florence, which slammed North and South Carolina in mid-September. The four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, rose 500 to 207,000 last week. The data continues to point to sustained labour market strength.

In other news, US Vice President Pence said that Chinese security agencies stole US technology, including military blueprints, and Bloomberg reported that China had implanted chips in computer motherboards made in Taiwan allowing them to be later hacked.

 

Today’s key data and events:

 

AU AiG Construction Sep prev 51.8 (8:30am)

JN H’hold Spending Aug exp 0.1% prev 0.1% (9:30am)

AU Retail Sales Aug exp 0.3% prev 0.0% (11:30am)

EZ Ger. Factory Orders Aug exp 0.8% prev -0.9% (4pm)

UK House Prices Sep exp 0.2% prev 0.1% (5:30pm)

US NF Payrolls Sep exp 184k prev 201k (10:30pm)

US Unemploy. Rate Sep exp 3.8% prev 3.9% (10:30pm)

US Avg Hourly Earnings Sep y/y exp 2.8% prev 2.9% (10:30pm)

US Trade Aug exp –$50.7bn prev –$50.1bn (10:30pm)

US Cons. Credit Aug exp $15.0bn prev $16.6bn (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.

 

Besa Deda, Chief Economist

Ph:02-8254-3251