Bank of Melbourne

Morning Report

Main Themes: Sentiment in equity markets remained upbeat, despite the Trump Administration’s attack on Chinese firm Huawei. US bond yields and the US dollar also rose, helped by a solid batch of US economic data. Australian interest-rate markets are pricing in a rate cut from the RBA as soon as June and the AUD is probing lower, after yesterday’s lift in the unemployment rate.
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Main Themes: Sentiment in equity markets remained upbeat, despite the Trump Administration’s attack on Chinese firm Huawei. US bond yields and the US dollar also rose, helped by a solid batch of US economic data.

Australian interest-rate markets are pricing in a rate cut from the RBA as soon as June and the AUD is probing lower, after yesterday’s lift in the unemployment rate.

Share Markets: US share markets rose for a third straight day, as investors focussed on solid earnings reports from Walmart and Cisco. The Dow Jones closed up 0.8% and the S&P 500 index 0.9%.

Interest Rates: US bond yields lifted overnight (i.e. Treasury prices fell), helped by a recovery in risk assets. The US 10-year treasury yield rose from 2.35% to 2.41% and the US 2-year yield rose from 2.15% to 2.21%. The chance of a Fed rate cut by December, implied by interest-rate futures, fell from 130% to 120%. September is priced at 60%.

However, Australian 3-year bond yields remained subdued at around 1.18% after the unemployment rate rose in April, sealing the fate for an RBA rate cut. RBA-watchers predicted such as Terry McCrann the RBA would ease as soon as June

Foreign Exchange: The US dollar index is up 0.3% on the day. EUR/USD fell from 1.1220 to 1.1170. GBP was the worst performer, falling from USD1.2850 to USD1.2788, amid a tense UK political situation. USD/JPY rose from 109.35 to 109.97.

The AUD/USD exchange rate extended its multi-week decline from 0.6930 to 0.6887 – a 16-month low. And NZD/USD fell from 0.6580 to 0.6532. AUD/NZD probed lower to 1.0522.

Commodities: Oil spiked on Iran concerns but gold prices fell in line with a rebound in risk assets.

Australia: Jobs growth remained firm, rising by 28.4k in April, above the consensus estimate of 15.0k. Indeed, the average job gain over the past three months continues to be in excess of 20k per month. The annual pace of jobs growth also picked up from 2.4% in March to 2.6% in April, the strongest in ten months.

However, the unemployment rate edged higher from a revised 5.1% in March to 5.2% in April, the highest in eight months. The unemployment rate is now 0.3 percentage points higher than the low of 4.9% hit in February. A rise in the participation rate to a record high of 65.8% contributed to the rise in the unemployment rate.

In the RBA board meeting minutes of April, the RBA outlined the preconditions for a rate cut. The preconditions were the inflation rate not moving higher and the unemployment rate trending higher. In late April, underlying inflation fell for Q1. This week, wages inflation stalled at 2.3% per annum. And yesterday, the unemployment rate rose. The preconditions have been met now for a rate cut. Our view since very early this year has been for rate cuts in August and November. However, it now looks increasingly likely that the RBA will cut in June.

United Kingdom: Prime Minister May agreed to set a time table for a Tory leadership race after her Withdrawal Agreement Bill is voted on in early June. Boris Johnson threw his hat in the ring and Dominic Raab and Penny Mordaunt could also be in the running to lead the Conservatives.

Europe: Eurozone’s trade surplus narrowed to €17.9 billion in March. This level is still up from late 2018 levels and remains within the range of the 2015-2017 period.

United States: Housing starts rebounded in April, rising by 5.7% in the month, after a 1.7% gain in March. Housing starts remain firmly within the firm range of the past three years. Permits also bounced back, up 0.6% in April.

The Philadelphia Fed’s index rose to 16.6 in May, from 8.5 in April. It mirrors the rebound in yesterday’s Empire survey and has now unwound the weakening seen since Q4 of 2018. There was also an encouraging improvement in the employment components.

Federal Reserve President Brainard suggested that the central bank might adopt a strategy of "opportunistic reflation" in which it accepts a slight overshoot of the 2% price target for a while. The goal would be to lift underlying inflation up to 2% and underscore the Fed's commitment to that objective.

 

Today’s key data and events:

NZ BusinessNZ Mfg PMI Apr prev 51.9 (8:30am)

NZ PPI Output Q1 prev 0.7% (8:45am)

JN Tertiary Ind. Index Mar exp 0.1% prev -0.6% (2:30pm)

EZ Construction Output Mar prev 3.0% (7pm)

EZ Core CPI Final Apr y/y exp 1.2% prev 1.2% (7pm)

US Leading Index Apr exp 0.2% prev 0.4% (12am)

US UoM Cons. Sent. May Prel. exp 97.2 prev 97.2 (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.

 

Besa Deda, Chief Economist
Ph:02-8254-3251