Bank of Melbourne

Morning Report

Main Themes: Risk aversion rose in financial markets overnight, as US-China trade tensions continued to hurt sentiment.



Main Themes: Risk aversion rose in financial markets overnight, as US-China trade tensions continued to hurt sentiment.

Share Markets: US technology shares led a broader sell off, as the fallout from the White House’s moves against Huawei reverberated and fuelled more worries about trade. Stocks of some of the biggest component makers fell hard. At the close, the Nasdaq was off 114 points (or -1.5%), the S&P 500 index was 19 points weaker (or -0.7%) and the Dow Jones fell 84 points (o -0.3%).

Interest Rates: The US 10-year treasury yield rose slightly from 2.40% to 2.42% and the 2-year yield from 2.20% to 2.22%. The chance of a Fed rate cut by December, implied by Fed fund futures, slipped modestly from 120% to 110%.

Foreign Exchange: The US dollar sold off slightly overnight, giving up the gains from the previous trading session. The Australian dollar depreciated against the US dollar through the overnight trading session, reaching an overnight low of 0.6890. The Reserve Bank (RBA) policy minutes are published later this morning and they are expected to cement market expectations for a near-term rate cut. The AUD/USD could be pressured lower in today’s Asian trading zone as a result.

Commodities: Oil prices bounced back overnight, as hints of extended production cuts by top crude producers overshadowed trade war concerns.

Australia: The RBA releases its board meeting minutes for 7 May later this morning. Recall the May meeting was one in which financial markets were on standby for a possible rate cut from the RBA. The last policy minutes for the 2 April board meeting outlined the conditions for a rate cut. Indeed, the minutes indicated that “if inflation did not move any higher and unemployment trended up…a decrease in the cash rate would likely be appropriate…”. Since those minutes, published data has revealed a drop in the inflation rate for Q1, a lift in the unemployment rate for April and wages growth at a standstill for Q1. These conditions have now been met. Today’s minutes and the RBA Governor’s speech later today should give us more insights and flavour around the likelihood of a near-term rate cut.

Europe: The current account surplus shrunk from €27.9 billion in February to €24.7 billion in March.

Japan: GDP unexpectedly expanded at an annualised rate of 2.1% in Q1, beating market expectations that was for an annualised decline of 0.2%. But the detail suggests the Japanese economy is on a weak footing. The biggest driver of growth in the quarter was imports contracting by more than exports, which meant that net exports added to growth. Falling imports are a sign of weak domestic demand. Capital spending and private consumption fell in the quarter, detracting from growth. Picking up some of the slack were public spending and rising inventories.

In other data, the final reading for industrial production dropped 0.6% in March and by 4.3% year-on-year.

New Zealand: The performance of services index fell to 51.8 in April, from 52.3 in March.

United Kingdom: House prices rose by 0.9% in May, after a lift of 1.1% in April, according to Rightmove. On a year ago, house prices moved from a contraction of 0.1% in April to growth of 0.1% in May.

United States: The Chicago Federal Reserve’s national activity index deteriorated in April to -0.45, from 0.05 in March. It is the third time in four months that the reading has been negative. The report suggests the US economy might be entering a softer patch of growth.

A number of Federal Reserve speakers spoke overnight about inflation. Federal Reserve Vice Chairman Richard Clarida suggested that unemployment may be able to fall further without triggering it. St. Louis chief James Bullard said he would advocate for a rate cut if core prices get stuck at low levels. Finally, Atlanta's Fed President Raphael Bostic said there's little indication that inflation is a concern.

In other news, Ford Motor Co said yesterday by the end of August it will cut 10% of its global salaried workforce, which represents around 7,000 jobs. This announcement underscores the troubles faced by the auto sector more generally, as the auto sector grapples with diesel scandals, emissions constraints and how to adapt to electric and driverless vehicles.


Today’s key data and events:


AU RBA Board Meeting Minutes (11:30am)

AU RBA Governor Lowe Speech on “The Economic Outlook and Monetary Policy” (12:15pm)

NZ Credit Card Spending Apr prev 5.1% (1pm)

OECD Economic Outlook Published (7pm)

UK CBI Trends Total Orders May exp -5 prev -5 (8pm)

US Existing Home Sales Apr exp 5.35mn prev 5.21mn (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