Bank of Melbourne

Morning Report

Main Themes: Sentiment remains mixed, as Chinese officials arrive in the US for trade talks. US bond yields and the US dollar are slightly firmer in overnight trade while share markets ended varied.

Main Themes: Sentiment remains mixed, as Chinese officials arrive in the US for trade talks. US bond yields and the US dollar are slightly firmer in overnight trade while share markets ended varied.

Share Markets: US share market indices closed mixed amid investor worries over the US-China trade talks. The Dow Jones edged up 2 points (flat) but the S&P 500 index closed 5 points lower

Interest Rates: US 2-year and 10-year bond yields lifted modestly overnight by 1 and 3 basis points, respectively. The chance of a Fed rate cut by December, implied by Fed fund futures, slipped from 85% to 80%.

Foreign Exchange: AUD/USD flirted briefly overnight above the 0.7000 handle, but is now trading back under this level and remains under downward pressure. When the RBA left the cash rate on hold after its Board meeting on Tuesday afternoon, the AUD jumped around three quarters of a US cent, but this gain was short-lived. In the near term, the AUD remains under a hint of downward momentum.

NZD/USD slipped from 0.6605 to a low of 0.6527 in response to yesterday’s rate cut from the Reserve Bank of New Zealand. In last night’s trading sessions NZD/USD largely stuck to a trading range of
0.6570-0.6598. The AUD/NZD, which very briefly spiked above 1.0700 following the NZ rate cut, drifted sideways overnight at around 1.0640.

Commodities: Oil jumped the most in more than two weeks, after an unexpected drop in US supplies added to evidence of a tightening global oil market. Meanwhile, gold retreated and a widely-watched basket of base metal prices, the LMEX index, also fell.

Australia: No major data to report.

China: China’s trade surplus narrowed from US$32.4 billion in March to US$13.8 billion in April. Imports were stronger than expected, lifting by 4.0% in the year to April. It was the first annual increase in five months, pointing to stronger domestic demand. However, exports fell 2.7% in the year to April, after a 13.8% increase in the year to March. While caution should be taken with this volatile month-to-month data, weaker exports is coming at time when trade is facing a renewed threat of increased tariffs.

Europe:  European Central Bank (ECB) President Draghi said overnight that he expects wages to rise, the stimulus measures to create jobs and push up inflation. He added "while we don't yet see feedback or the transmission of these higher nominal wages growth into higher inflation" it is a matter of being patient and persistent with the accommodative monetary policy and “it will come, it will happen".

New Zealand: The Reserve Bank of New Zealand (RBNZ) lowered the official cash rate (OCR) by 25 basis points to 1.50% yesterday. It was a widely-expected decision. Uncertainty regarding the global economic outlook, slower domestic growth and expectations for inflationary pressure to rise only slowly were key factors behind the decision.

The RBNZ also lowered the OCR forecast to 1.4%, thus leaving the door open to further easing but not strongly signalling it. In the one-page media release, there was no obvious policy guidance paragraph – an unusual departure from the norm.

In an interview early this morning, RBNZ Governor Orr said yesterday’s cut was the best choice because it put them ahead of the curve. Orr said it also had the benefit of taking pressure off the exchange rate. However, he added that it was too early to tell if another rate cut will be needed.

United Kingdom: House prices rose by 1.1% in April, after a decline of 1.6% in March, according to Halifax. In the three months to April, house prices rose by 5.0% compared with the same time a year ago. The UK property market has been stagnant as uncertainty over Brexit and the economic outlook discouraged buyers. However, a shortage of housing, solid employment growth and low mortgage rates are helping to underpin housing prices.

United States: Federal Reserve Board Governor Brainard last night in a speech said she wants to explore whether the central bank, in a future downturn, should begin targeting explicit levels for longer-term interest rates as a way of adding more stimulus to the economy. While not endorsing the use of such a strategy, Brainard said she would like to hear more about it as the US Federal Reserve continues a broad review of how it conducts monetary policy.

In other news, US President Trump tweeted that “China has just informed us that they (Vice-Premier) are now coming to the US to make a deal”.


Today’s key data and events:


UK RICS House Price Bal. Apr exp -22% prev -24% (9:01am)

CH CPI Apr y/y exp 2.5% prev 2.3% (11.30am)

CH PPI Apr y/y exp 0.6% prev 0.4% (11.30am)

GE Industrial Production Mar exp -0.5% prev 0.7% (4pm)

US PPI Final Apr y/y exp 2.3% prev 2.2% (10.30pm)

US Trade Mar exp -US$50.2bn prev -US$49.4bn (10.30pm)

US Initial Jobless Claims w/e May 4 exp 220k prev 230k (10:30pm)

US Federal Reserve’s Bostic Speaks (11:45pm)

US Federal Reserve’s Evans Speaks (3.15am)


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