Main Themes: National holidays in the US and UK meant trading in currency and bond markets was thin. Major currencies largely stuck to trading in narrow ranges. US bond and share markets were closed. US President Trump made remarks on trade overnight that suggested trade tensions are deteriorating further.
Share markets: US share markets were closed overnight due to a national holiday. European share markets closed higher. The Euro Stoxx 50 index ended 13 points higher (or +0.3%). European investors were relieved that the weekend's European elections resulted in less support for populist/anti-EU parties than feared.
Interest Rates: US 10-year treasury futures yields slipped from 2.32% to 2.30%. The physical US bond markets were closed. The chance of a Fed rate cut by December, implied by Fed fund futures, remained at 130%. In Europe, the 10-year German bond yield fell from -0.11% to -0.14%.
Foreign Exchange: Major currencies stuck to narrow trading ranges overnight with the US and UK on holiday, causing thin trading in FX markets. The US dollar was slightly firmer on the day, despite US President Trump’s remarks on trade. AUD/USD slipped from near 0.6940 to 0.6913 and is currently trading just above the overnight low.
Commodities: Brent crude oil rose overnight on concerns about supply disruption from Iraq and Libya. Gold was also higher.
Australia: Yesterday the Victorian State government delivered its 2019-20 Budget. The government’s fiscal position remains in good shape. A general government operating surplus of $1.0 billion is forecast for 2019-20, down slightly from the expected $1.1 billion surplus anticipated for 2018-19. The government is forecasting surpluses to continue and grow over the years to 2022-23.
State taxation revenue has been hit by the downturn in the property market. This will keep revenue contained in 2019-20 with a recovery in residential housing not expected by the State government until around 2020-21.
The Victorian economy was the fastest growing State economy in 2017-18 and is will likely remain so in 2018-19. Slower economic growth is anticipated in 2019-20 and in 2020-21, but the government’s growth forecasts remain above the long-run average. Population growth is expected to ease only modestly.
However, the wages growth forecasts stand out as too high, especially for 2018-19 and 2019-20. It means income tax revenue might not be as strong as the government is anticipating, leaving the government vulnerable to missing its general government operating forecasts.
As in recent years, infrastructure spending continued to be a key feature of the Budget. A further $34.5 billion in new asset initiatives was announced in 2019-20 with the suburban transport blitz at the centre of this new spending.
The key business initiatives in this year’s Budget were to lift the payroll tax-free threshold across Victoria to $700,000 by 2022-23 and cut the regional payroll tax rate from 50% to 25% of the metropolitan rate by 2022-23.
One of the other key initiatives for business is the provision of a 50% discount on land transfer duty on regional commercial and industrial property transactions by 2023-24.
The key initiatives for households were focused on early childhood education. A total of $882 million is being invested to support every child in Victoria access to at least five hours per week of subsidised three-year old kinder by 2022. Energy assistance also featured with the Solar Homes program set to receive extra funding over the next 5 years.
China: Industrial companies’ profits fell by 3.7% in the year to April, compared with annual growth of 13.9% in March. The decline in April was attributed to a VAT cut and a high base a year ago.
United States: US President Donald Trump said the US is "not ready" to reach a trade agreement with China, in contrast with Xi Jinping's government. Trump added "they probably wish they made the deal that they had on the table before they tried to renegotiate it". Trump threatened to boost levies "very, very substantially”.
Today’s key data and events:
JN PPI Services Apr y/y exp 1.1% prev 1.1% (9:50am)
UK Hous. Loans Finance Apr exp 39525 prev 39980 (6:30pm)
EZ Econ, Busin, Ind, Serv & Cons Confid Indexes May (7pm)
US House Price Purchase Index Q1 prev 1.1% (11pm)
US FHFA House Price Index Mar exp 0.2% prev 0.3% (11pm)
US S&P CoreLogic CS 20-City Composite Home Prices exp 0.5% prev 0.2% (11pm)
US CB Cons. Confidence May exp 130.0 prev 129.2 (12am)
US Dallas Fed Mfg Index May exp 5.8 prev 2.0 (12:30am)
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