Main Themes: Global trade tensions was the key focus of markets on Friday. Safe-haven currencies and assets benefited with US 2-year bond yields dropping to a 2-year low and gold rising to a 2-month high. Tweets from US President Trump on the weekend heightened worries over trade.
Share markets: US share markets finished in the red on Friday, as investor worries about the trade war heightened. The Dow Jones index closed 355 points lower (or -1.4%) and the S&P 500 index ended down 37 points (or -1.3%). In fact, these declines meant US share markets capped their worst month of the year on Friday.
Interest Rates: US 10-year treasury yields fell from 2.18% to 2.13%, which is the lowest since September 2017, and 2-year yields fell from 2.03% to 1.91%. Markets repriced Federal fund rate expectations; a cut is fully expected by September and another by December.
Australian 3-year yields fell from 1.12% to 1.10% and 10-year yields fell from 1.50% to a record low of 1.46%. The market’s probability for a rate cut at tomorrow’s RBA meeting remained at 100%. A a follow-up cut in August is at 90%.
Foreign Exchange: The US dollar index closed down 0.4% on the day. EUR/USD rose from 1.1130 to 1.1180. USD/JPY fell from 109.00 to a 5-month low of 108.28, as safe-haven flows supported the Japanese yen. AUD/USD rose from 0.6905 to 0.6944, as a weaker US dollar underpinned a stronger AUD, despite the more risk averse mood among investors. NZD/USD similarly rose from 0.6495 to 0.6547 and AUD/NZD fell from 1.0630 to 1.0600.
Commodities: Crude oil prices dropped on Friday and safe-haven gold lifted to a six-week high of $1,306 a tonne, as trade tensions impacted commodity markets.
Australia: Private sector credit data was undeniably weak. Monthly growth slowed to a 0.2% pace in April, following two consecutive months of growth at 0.3%. The annual pace eased from 3.9% in March to 3.7% in April, which was the weakest annual pace since November 2013.
Business credit ground to a halt in April, the weakest rate in eleven months. While business credit is more volatile than the other sectors, a shift downwards in business conditions and confidence earlier in the year foretold some caution among businesses, which appears to be now flowing through to lending. Annual growth edged down from 5.0% to 4.5%.
Housing credit grew just 0.3% in April, taking the annual rate of growth to 3.9%, the weakest since this data series began in 1976. For the month, growth was entirely driven by owner-occupier credit, which grew 0.4%. Credit to investors was flat and has not grown for four consecutive months. Soft growth in home lending is continuing to suggest ongoing weak conditions in the housing market, despite more positive signs for prices from auction clearance rates.
The weak growth in credit corresponds with the loss of momentum in the domestic economy since the second half of 2018. Some confidence among businesses and households could be restored post the federal election, however, there are some more long-lasting headwinds. The latter include ongoing global trade tensions, weak income growth and high household debt levels.
China: The purchasing managers’ index (PMI) for manufacturing retreated to 49.4 in May, from 50.1 in April. The employment sub-index fell to its lowest level since the GFC. A reading under 50.0 suggests a contraction in activity in the months ahead. Escalating trade tensions are a factor that has likely contributed to the softer reading.
Japan: There was a big batch of data released on Friday. This data revealed a 0.1 percentage point drop in the jobless rate to 2.4% in May. The data also showed a rise in industrial production of 0.6% in May, although the annual rate remains flagging at a contraction of 1.1%. Retail sales were flat in May and annual growth just 0.5%.
New Zealand: Consumer confidence fell by 3.2% in May, but the index remains high at 119.3, suggesting the optimists outweight the pessimists.
United Kingdom: Liverpool beat Tottenham 2-0 in the Champions League Final held yesterday.
In terms of key data on Friday, house prices fell by 0.2% in May and the previous month’s growth rate was revised slightly lower. Annual growth slowed from 0.9% in April to 0.6% in May.
United States: Personal incomes and spending both rose by more than expected in April. Incomes rose 0.5% and spending advanced 0.3% and the previous month was revised +0.2 percentage points to 1.1%, an encouraging update on the consumer.
The core personal consumption expenditure (PCE) inflation gauge keenly watched by the Federal Reserve posted a modest rebound in April. The gauge rose by 0.3% after tepid gains in the previous three months. This outcome provides some early support for the Fed’s view that recent low inflation has been transitory.
Consumer sentiment rose by less than initially thought in May. The University of Michigan’s survey was revised down to (a still healthy) 100.0, from a preliminary estimate of 102.4, as more survey respondents incorporated heightened trade tensions and global market jitters.
The Chicago PMI survey firmed to 54.2 in May, from a two-year low of 52.6 in April.
Trade rifts escalated with tweets from the US President Trump over the weekend. In these tweets Trump celebrated his trade policies and the recent move to impose tariffs on Chinese and Mexican goods, saying "companies are moving to the US" to avoid paying the levies and that "TARIFF is a beautiful word indeed!" Trump had more harsh words for Mexico on Sunday, questioning the value of talks, days before a high-level delegation from Mexico is expected to meet with US officials.
Moreover, US President Trump ended India's designation as a developing nation, eliminating an exception that allowed the country to export some 2,000 products to the US duty-free.
Today’s key data and events:
JN Capital Spending Q1 y/y exp 2.6% prev 5.7% (9:50am)
AU CoreLogic House Prices May prev -0.5% (10am)
AU MI Inflation Gauge May prev 0.2% (11am)
AU Job Ads May prev -0.1% (11:30am)
AU Business Indicators Q1 (11:30am)
Co. Operating Profits Q1 exp 2.0% prev 0.8%
Inventories Q1 exp -0.1% prev -0.2%
CH Caixin Mfg PMI May exp 50.0 prev 50.2 (11:45am)
EZ Markit Mfg PMI May Final exp 47.7 prev 47.7 (6pm)
UK Markit Mfg PMI May exp 52.2 prev 53.1 (6:30pm)
US ISM Manufacturing Index May exp 53.0 prev 52.8 (12am)
US Construction Spending May exp 0.4% prev -0.9% (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