Bank of Melbourne

Morning Report

Main Themes: US Federal Reserve Chairman Clarida made some dovish remarks that influenced share markets, bonds and currencies.


Main Themes: US Federal Reserve Chairman Clarida made some dovish remarks that influenced share markets, bonds and currencies.

Share markets: US share markets finished higher, underpinned by US Federal Reserve Chairman Clarida opening the door, just a crack, to possible rate cuts. The Dow Jones rose by 43 points (or +0.2%) and the S&P 500 index lifted by 6 points (or +0.2%). Most major European bourses also finished higher in last night’s session.

Interest Rates: US 10-year treasury yields fell by 2 basis points and 2-year yields fell by just 1 basis point to 2.07%. The chance of a Fed rate cut by December, implied by interest-rate futures, increased after Clarida’s remarks. The probability of a 25 basis point rate cut at the September meeting is now 100%.

Australian 3-year yields fell from 1.14% to 1.12% and 10-year yields fell from 1.56% to 1.52%. The probability attached to a rate cut by at the RBA’s June 4 meeting remained at 100%.

Foreign Exchange: The US dollar index ended the overnight trading session close to where it started. The US dollar appreciated in the London session, but those gains disappeared after the dovish remarks from the US Federal Reserve Vice Chairman. AUD/USD slipped from 0.6936 to 0.6896. The Australian dollar’s dip under 0.6900 was very short lived with the AUD trying to find a range between 0.6900-0.6940 to stick to. As the RBA board meeting nears, the AUD/USD might come under downward pressure, despite the rate cut being fully priced.

Commodities: Oil prices tumbled after a smaller-than-expected withdrawal from US storage facilities fuelled worries about excess supplies.

Australia: Private capital expenditure data yesterday was a mixed bag. Actual spending weakened across all sectors and industries. However, spending plans for this year and next year remained encouraging, despite data showing fragile sentiment among businesses. The bulk of businesses were also surveyed ahead of the Federal election. Elections by their very nature bring uncertainty and can cause businesses to pull back or stall on spending plans.

Private capital expenditure fell by 1.7% in the March quarter, which is the third quarterly contraction in a year. On a year ago, capex is 1.9% lower, which is the weakest annual pace since the June quarter of 2017.

We received the sixth estimate for spending in 2018-19. It stands at $122.2 billion, representing an upgrade of nearly 4.0% on the previous estimate. These spending plans now imply an increase of 2.4% in 2018-19 compared with 2017-18.

The second estimate for spending for the 2019-20 financial year was also encouraging. This second estimate is $99.1 billion, up from the second estimate of $87.9 billion for 2018-19. Applying realisation ratios, this second estimate suggests a lift in spending in 2019-20 of 6.0%.

Building approvals fell 4.7% in April, coming off the heels of a 13.4% decline in March. The 17.4% decline over the last two months was the largest since October 2016 and on a year ago, building approvals are dropped 24.2%. There might have been some negative impact over the Easter and ANZAC day holiday period on top of some uncertainty ahead of the Federal election. However, other housing indicators continue to suggest underlying weakness in residential construction.

The Fair Work Commission announced an increase to the national minimum wage of 3% to take effect on July 1. The minimum wage will rise to $740.80 per week or $19.49 an hour. It follows a 3.5% increase last year.

Europe: Italy’s fragile coalition is becoming more precarious as Deputy Prime Minister Salvini, whose Lega Party has seen a steady increase in support, is pushing for 5-Star to back a controversial flat tax plan. Such a tax would increase tensions between Italy and the EU over budgetary responsibility.

New Zealand: Building consents fell by 7.9% in April. The drop following another sizeable fall of 7.4% in March, although there were stronger increases earlier in the year. Consent issuance is signalling activity flattening out, but remaining at a high level. 

United States: Federal Reserve Vice Chairman, Richard Clarida, opened the door to a rate cut. Clarida said the central bank is prepared to ease policy if it sees mounting risks to its outlook. He stressed the US economy is in a "very good place" with unemployment low and inflation muted.

Economic growth for Q1 remained solid. Revised estimates showed that GDP was revised down by less than expected to an annualised rate of 3.1% in Q1, from 3.2%. Consumer spending grew 1.3%, topping projections, though still the slowest in a year. The price deflators were also trimmed; the core personal consumption expenditure (PCE) deflator was revised to 1.0% annualised growth in Q1, from an initial estimate of 1.3%.

Initial jobless claims rose by 3,000 last week to 215,000, close to consensus expectations. The 4-week moving average posted a decrease of 3,500. The data remains consistent with a very tight labour market.

Pending home sales unexpectedly declined 1.5% in April, after a rise of 3.9% in March. Pending home contracts are seen as a forward-looking indicator of the health of the housing market because they become sales one to two months later. Compared to one year ago, pending home sales were down 2.0%, marking the 16th straight month of annual decreases.


Today’s key data and events:

NZ Consumer Confidence May prev 123.2 (8am)

UK GfK Consumer Sentiment May exp -12 prev -13 (9.01am)

JN Jobless Rate Apr exp 2.4% prev 2.5% (9:30am)

JN Job-to-Applicant Ratio Apr exp 1.63 prev 1.63 (9.30am)

JN Industrial Production Apr exp 0.2% prev -0.6% (9.50am)

JN Retail Sales Apr exp 0.6% prev 0.2% (9:50am)

CH Composite PMI May prev 53.4 (11am)

CH Manufacturing PMI May exp 49.9 prev 50.1 (11am)

CH Non Manufacturing PMI May exp 54.3 prev 54.3 (11am)

AU Private Sector Credit Apr exp 0.2% prev 0.3% (11.30am)

EZ Ger. Retail Sales Apr exp 0.1% prev 0.0% (4pm)

UK Nationwide House Prices May exp 0.0% prev 0.4% (4pm)

EZ Ger. CPI May y/y 1.4% prev 2.1% (10pm)

US Personal Income Apr exp 0.3% prev 0.1% (10.30pm)

US Personal Spending Apr exp 0.2% prev 0.9% (10.30pm)

US PCE Core Inflation Apr exp 1.6% prev 1.6% (10.30pm)

US Chicago PMI May exp 54.0 prev 52.6 (11.45pm)

US UoM Consumer Sentiment May Final exp 101.5 prev 102.4 (12am)

Champions League Final, Liverpool vs Tottenham (Sun 5am)


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