Bank of Melbourne

Morning Report

Main Themes: Risk aversion among investors remains elevated. The US dollar sold off, US share markets finished in the red again and US bond yields ended little changed.

Main Themes: Risk aversion among investors remains elevated. The US dollar sold off, US share markets finished in the red again and US bond yields ended little changed.

Share Markets: US stocks ended lower in a choppy trading session, as technology stocks were pressured by ongoing worries over interest rates and corporate earnings. The Dow Jones closed down 89 points (or -0.4%) and the S&P 500 index ended 16 points weaker (or 3-0.6%). The Nasdaq ended 66 points softer (or -0.9%).

Interest Rates: The US 10-year treasury yield edged up 1 basis point, despite share market volatility and weaker-than-expected headline retailing data in the US. However, for much of the session, US 10-year yields traded in a narrow range. The 2-year yield finished flat and largely ranged between 2.84% and 2.86%. Fed fund futures yields continued to price the chance of another rate hike in December at 80%.

Foreign Exchange: The US dollar index was under pressure during the overnight session, falling to a two-week low. EUR/USD rose from 1.1545 to 1.1606. USD/JPY fell from 112.20 to 111.60. AUD/USD rose from 0.7100 to a two-week high of 0.7149. The outperformer was the NZD and it rose from 0.6500 to a two-week high of 0.6557 –amid bullish expectations for today’s inflation data. AUD/NZD fell from 1.0935 to 1.0900.

Commodities: Oil prices closed only modestly higher, after Saudi Energy Minister Khalid Al-Falih said the kingdom will continue to be a responsible oil supplier and will help to keep the market stable.

In other commodity news, Vale's quarterly iron ore output surpassed 100 million metric tons for the first time ever in the third quarter, amid rising Chinese appetite for its top-grade material used in steelmaking. Sales also reached a record. Rio Tinto and BHP will give their own updates over the next few days.

Australia: There was no major economic data released in Australia yesterday. The Reserve Bank Board meeting minutes from earlier this month will be published later today.

New Zealand: The performance of services index improved from 53.3 in August to 53.9 in September. The index remains down from elevated levels over much of 2017, but is continuing to suggest an expansion in services.

United Kingdom: House prices rose by 1.0% in October, but the annual growth rate still slowed, from 1.2% in September to 0.9% in August.

Prime Minister May delivered an update on Brexit negotiations to Parliament. While admitting to frustration over a failure to progress on the thorny issue of the Irish Border and customs, she insisted that she would not allow this to derail negotiations.

United States: Former Federal Reserve Chair Janet Yellen said the Fed needs to move rates to neutral to stabilise the labour market. Yellen further expressed concerns the economy may overheat. Yellen also warned that the yield curve has previously been a good recession signal, but this time it may be different.

Retail sales underwhelmed in September with a gain of just 0.1%. Consensus had expected a 0.6% rise. A rebound in motor vehicle purchases was offset by the biggest drop in spending at restaurants and bars in nearly two years. Spending in the month might have been hurt by Hurricane Florence.

However, the retailing picture is healthier when volatile items are excluded. The retail control group - a subset that excludes food services, gasoline, auto and building materials - rose by 0.5% in September, in line with expectations. This control group or core retail sales corresponds most closely with the consumer spending component of GDP.

The US federal government posted the largest deficit for the fiscal year (i.e. the twelve months to September) since 2012 at US$113 billion. The deficit is 17% bigger than in the same period a year ago. Much of the widening of the deficit came from spending on interest payments on the national debt.

In other data, business inventories rose 0.5% in August, after a 0.7% gain in July.

World:  Global foreign direct investment (FDI) fell by 41% to US$470 billion in the first six months of this year, the lowest since 2005, preliminary figures from the United Nations trade and development agency UNCTAD. President Trump's US tax reforms were the main cause of the slump, which followed a 23% fall in 2017, as US firms repatriated a net US$217 billion from foreign affiliates.


Today’s key data and events:

NZ CPI Q3 exp 0.7% prev 0.4% (8:45am)

AU RBA Board Meeting Minutes Oct (11:30am)

CH PPI y/y Sep exp 3.6% prev 4.1% (11:30am)

CH CPI y/y Sep exp 2.5% prev 2.3% (11:30am)

UK ILO U/E Rate Aug exp 4.0% prev 4.2% (6:30pm)

EZ Trade Aug exp €14.7bn prev €12.8bn (7pm)

EZ EU ZEW Expectations Oct prev -7.2 (8pm)

EZ Ger. ZEW Expect’ns Oct exp -12.0 prev -10.6 (8pm)

UK Jobless Claims Chg Sep prev 8.7k (7:30pm)

US Indust. Prod’n Sep exp 0.2% prev 0.4% (12:15am)

US NAHB Housing Market Oct exp 67 prev 67 (1am)


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