Bank of Melbourne

Morning Report

Main Themes: Investor sentiment was mixed after the US raised tariffs on China. US share markets ended higher, as investors focussed on the subdued US inflation data. US bond yields inched higher and the US dollar ended the session little changed.

Main Themes: Investor sentiment was mixed after the US raised tariffs on China. US share markets ended higher, as investors focussed on the subdued US inflation data. US bond yields inched higher and the US dollar ended the session little changed.

Share Markets: Share markets finished higher on Friday, as US inflation data confirmed the Federal Reserve is unlikely to consider raising rates again any time soon. The Dow Jones closed up 114 points (or +0.4%) and the S&P 500 index finished up 11 points (or +0.4%). Also on Friday, Uber had its first day of trading. Uber is arguably the most talked about start-up of the decade and is the biggest IPO this year. However, it was a rough first day of trading for Uber. Its shares plunged immediately at the opening of trading on Friday, falling as much as 8.8% from its $45 offering price, a level that was already at the low end of expectations. The stock closed at $41.57 with Uber joining a small group of major IPOs that ended their first day down.

Interest Rates: The US 2-year and 10-year bond yields finished modestly higher on Friday. The chance of a rate cut from the US Federal Reserve by December, as implied by Fed fund futures, remained at around 90%.

Foreign Exchange: In Friday overnight trade, the USD sold off but later recovered to finish little changed in the session. The AUD/USD exchange rate traded a very narrow range of 0.6979-0.7009. Since the start of this year, AUD/USD has spent most of its time in a range of 0.7000-0.7300. Since late April when market odds of a near-term RBA rate cut from the RBA shortened, the RBA has tried to find a new and lower trading range of around 0.6960-0.7050. This trading range is unlikely to hold for long with the AUD likely to continue to be under pressure from the possibility of a rate cut later this year from the RBA.

Commodities: Oil was flat on Friday and gold prices rose. In other news, the top iron ore producer, Vale, said on Friday that it will take 2-3 years to meet the 400 million metric ton output target the company had originally set for 2019. Vale halted operations with a combined capacity of 93 million metric tons to improve safety after a dam disaster in January. The news has led some analysts to revise up their iron ore price forecasts for this year.

Australia: It was hoped that Friday’s Statement on Monetary Policy would provide further information into the RBA’s thinking, after Tuesday’s highly anticipated board meeting. As previously flagged, growth, employment and inflation forecasts were downgraded. GDP growth is expected to be around 2¾ over 2019 and 2020, which is a pace close to the long-run average. The unemployment rate is expected to hold steady at 5%, before edging lower to 4.75% by mid 2021. The RBA has suggested that a lower rate of unemployment would be consistent with their inflation target. Given the RBA’s expectation for an unchanged unemployment rate out to 2020, it highlights the risk that the RBA will need to lower the cash rate if we do not see an improvement in the labour market.

China: US President Trump escalated his trade war with China on Friday morning, raising tariffs on US$200 billion worth of Chinese goods and taking steps to tax nearly all of China’s imports as punishment for what he said was Beijing’s attempt to “renegotiate” a trade deal. Trump’s decision to proceed with the tariff increase came after a pivotal round of trade talks in Washington last Thursday night failed to produce an agreement to forestall the higher levies. Talks resumed again on Friday but the two sides could not bridge their differences to prevent the increase in tariffs.

In a statement on Friday, China’s Ministry of Commerce said in a statement that the Chinese government “deeply regrets that it will have to take necessary countermeasures.” It didn’t specify what those countermeasures might be. The statement added that it “hoped that the US and Chinese sides will meet each other halfway and work together” to resolve their dispute.

In terms of data on Friday, the current account surplus widened from US$54.6 billion in Q4 to US$58.6 billion in Q1.

Japan: Household spending grew 2.1% in the year to March, above the 1.6% estimated by consensus. It was the strongest pace in seven months. However, there was other less positive news with a fall in wages. Labour cash earnings fell 1.9% from a year ago, which pose a downside risk for future household spending.

New Zealand: Retail card spending lifted 0.6% in April after a 0.2% fall in March. It was below consensus estimates for a 0.8% rise and suggests modest growth in consumer spending ahead.

United Kingdom: GDP expanded by 0.5% in Q1 and by 1.8% in the year to Q1, up from 1.4% in the year to Q4. The GDP outcome was in line with market expectations. The detail in the data showed signs of Brexit-related issues; for example, there was stockpiling by companies and a wild swing in net trade. However, consumer spending growth was firm and underpinned growth in the quarter. Weaker growth in Q2 is likely, as business investment slows and stock-building reverses.

Industrial production rose by 0.7% in March and the annual growth rate of production jumped to 1.3%, from 0.4% in the previous month.

The visible trade deficit narrowed to £13.7 billion in March, after widening sharply to £14.4 billion in February. A slight recovery in exports helped the deficit narrow.

United States: US consumer prices rose moderately in April and underlying inflation remained muted, supporting the Federal Reserve's projection of no further interest rates increases this year. The CPI increased 0.3% in April, underpinned by rising gasoline, rents and healthcare costs. In the year to April, the headline CPI lifted 2.0%, after advancing 1.9% in the year to March.

Excluding the volatile food and energy components, the (core) CPI edged up just 0.1% as apparel prices dropped for a second straight month and the cost of used motor vehicles and trucks declined further. The so-called core CPI has now increased by the same margin for three straight months. In the 12 months through April, the core CPI increased 2.1% after gaining 2.0% in March.

The Federal Reserve, which has a 2% inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy. The core PCE price index increased 1.6% on a year-on-year basis in March, the smallest rise in 14 months, after advancing 1.7% in February. The April PCE price index data will be published later this month.

In other news, New York Federal Reserve President Williams reiterated the US economy was doing well. He expects GDP growth of around 2.25% this year.

Atlanta’s Federal Reserve President Bostic said policymakers are aligned over the patient approach to rates. Bostic added that he does not see inflation decelerating from the 2% goal and expected one more rate tightening this year.


Today’s key data and events:

AU Housing Finance Mar (11:30am)

   Number of Owner-Occupier Loans exp -1.0% prev 0.8%

   Value of Owner-Occupier Loans exp -1.5% prev 3.4%

   Value of Investor Loans exp -2.5% prev 0.9%


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