Bank of Melbourne

Morning Report

Main Themes: Trade tensions continue to be of focus for markets. Sentiment improved after Trump temporarily suspended the restrictions on Huawei. Shares and bond yields were higher. The Australian dollar fell on increased expectations of a near-term RBA rate cut.



Main Themes: Trade tensions continue to be of focus for markets. Sentiment improved after Trump temporarily suspended the restrictions on Huawei. Shares and bond yields were higher. The Australian dollar fell on increased expectations of a near-term RBA rate cut.

Share Markets: US shares lifted, led by the tech sector, as Trump granted relief on firms dealing with Huawei. The Nasdaq gained over 1.0%, while the Dow and S&P500 rose 0.8% and 0.9%, respectivey.

Interest Rates: Yields on US treasuries edged higher, as risk appetite improved. US 10-year yields lifted 1 basis point to 2.43%. US 2-year yields rose 4 basis points to 2.26%.

Australian yields fell yesterday after the RBA firmed its signal it would lower interest rates. Australian 10-year bond yields fell 4 basis points to 1.63%.

Foreign Exchange: The US dollar index dipped, but then recovered to be slightly higher. The big mover was sterling, which bounced after PM May put forward a new Brexit proposal, but then lost gains after it became clear there was still a lack of support. The Australian dollar fell after the RBA minutes, and again following Lowe’s comments which signalled a rate cut was increasingly on the cards. Losses persisted in the overnight session, dropping to as low as 68.7 US cents before settling at 68.8 US cents this morning.

Commodities: Oil prices weakened despite the improvement in risk appetite in other markets, with concerns still lingering regarding demand.

Australia: We have been forecasting two rate cuts for this year since February 21. At the time, these forecasts were non-consensus. Yesterday we brought forward the timing of rate cuts to June and August, from August and November previously.

We did not expect the RBA to have cut in May, but conceded it would be a close call. In recent weeks, we have highlighted that June is a live date.

The board meeting minutes for May 7 published yesterday and Lowe’s speech yesterday clearly spelt out a rate cut is on the way in June.

Two paragraphs stood out in the minutes. The first paragraph included a statement that “members considered the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate”. Since the April board meeting, data showed a rise in the unemployment rate to an eight-month high of 5.2%, despite ongoing firm jobs growth.

The minutes emphasised the RBA’s growth and inflation forecasts were based on the assumption that the cash rate followed the path implied by market pricing. At the time the forecasts were prepared, market pricing implied a cut in the cash rate to 1% over the next year. However, the RBA’s growth and inflation forecasts are hardly anything to write home about; the growth and inflation forecasts are sub par for 2019.

The RBA has faced an unusual situation over much of the past year where the economy has lost momentum since the second half of last year, but the labour market has continued to show ongoing surprising strength. RBA Governor Lowe in yesterday’s afternoon’s speech to a Brisbane audience suggested they are not expecting the labour market to surprise on the upside, as it has done in recent months.

Lowe indicated that we can have a lower unemployment rate that is consistent with the inflation target and should have an unemployment rate that is lower and monetary policy would help achieve these outcomes.

From an inflation angle, Lowe said it will take a long time to get inflation back to the target band and the target remains the RBA’s “north star”, again implicitly suggesting monetary policy might need to help lead inflation back to the band.

Europe: Consumer confidence improved from -7.3 in April to -6.5 in May, the highest in seven months.

Japan: Housing loans expanded by 2.4% in Q1, after another rise of 2.4% in Q4.

New Zealand: Credit card spending jumped 4.5% in April, after the same-sized increase in March.

Global: The OECD lowered its growth forecasts for 2019 from 3.3% to 3.2%, citing trade tensions which have impacted manufacturing production, a slowdown in investment and weaker confidence.

United Kingdom: UK Prime Minister is attempting to pass her Brexit deal for the fourth time through parliament after providing “significant further changes”. May offered the prospect of a second referendum on the agreement and compromise on customs arrangements. However, the opposition leader Corbyn has said he cannot vote for the offer which was “largely a rehash of the government’s position”. Brexit hardliners have also said that they would not support the deal.

United States: US President Trump offered a temporary reprieve to the tech sector, by allowing Huawei a license to buy US goods until August 19.

Existing home sales slipped 0.4% in April, following a 4.9% decline in March. While an improvement in pending home sales and mortgage applications suggest the housing market is responding to the recent fall in borrowing costs, it will likely take time for this to flow through to actual activity.

Boston Federal Reserve President Rosengren said that the trade tensions added a downside risk to the economic outlook, supporting the case for rates to remain steady. Rosengren was unperturbed by the recent fall in inflation, instead referring to the “trimmed-mean” measure of underlying inflation which strips out volatile items, which had held close to the Fed’s target of 2%.


Today’s key data and events:

NZ Retail Sales Ex Inflation Q1 exp 0.6% prev 1.7% (8:45am)

JN Trade Apr exp -37.5bn prev -177.8bn (9:50am)

JN Core Machine Orders Mar exp 0.0% prev 1.8% (9:50am)

AU Leading Index Apr prev 0.19% (10:30am)

AU Skilled Vacancies Apr prev 1.5% (11am)

AU Const’n Work Done Q1 exp 0.0% prev -3.1% (11:30am)

UK Core CPI Apr y/y exp 1.9% prev 1.8% (6:30pm)

UK House Price Index Mar y/y exp 1.0% prev 0.6% (6:30pm)

US FOMC Meeting Minutes for May 1 (4am)


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.


Janu Chan, Senior Economist