Bank of Melbourne

Morning Report

Main Themes: Investors are dramatically ramping up bets that the US Federal Reserve will start a rate-cutting cycle later this year. Remarks by St Louis Federal Reserve President Bullard overnight accelerated these rate-cut expectations, pushing bond yields, the US dollar and US equities lower.


Main Themes: Investors are dramatically ramping up bets that the US Federal Reserve will start a rate-cutting cycle later this year. Remarks by St Louis Federal Reserve President Bullard overnight accelerated these rate-cut expectations, pushing bond yields, the US dollar and US equities lower.

Share markets: The broader share market index, the S&P 500 index, fell 8 points (or -0.3%), although the Dow Jones managed to eke out a tiny gain of 5 points.

Interest Rates: The bond rally marched on with 10-year Treasury yields dropping below 2.06% during intraday trading, the lowest since September 2017. At the close, US 10-year yields were 5 basis points lower and US 2-year yields were 9 basis points weaker.

Foreign Exchange: The US dollar weakened again overnight, as investor conviction grew that the Fed will cut the federal funds rate later this year. The weaker USD helped AUD/USD rise from 0.6940 to 0.6983. The key resistance level of 0.7000 has continued to remain elusive with global-growth concerns and trade tensions constraining the AUD’s rise.

Commodities: The ongoing trade conflict is weighing on prices of most commodities. Oil prices dropped reflecting concerns over global demand. Gold prices lifted as trade tensions boosted safe-haven buying. In oil-specific news, the Saudi Energy Minister overnight called recent oil-price volatility "unwarranted" and said OPEC will "do what is needed to sustain market stability beyond June”.

Australia: We expect the RBA to cut the cash rate by 25 basis points today, taking it to 1.25%. The RBA board meets today and an announcement will be made at 2:30pm AEST. The RBA Governor will also give a speech this evening in Sydney at 7:30pm at an RBA board dinner.

There was a large batch of domestic data released yesterday. Firstly, there was dwelling prices published by CoreLogic. Dwelling prices fell 0.4% in the combined capital cities measure in May, which represents the 14th consecutive monthly decline. However, this decline was the smallest in just over a year. The recent trend of monthly price declines becoming smaller together with an improvement in auction rates suggests a bottom might be near for dwelling prices in the key capital cities of Sydney and Melbourne.

Secondly, there was the business indicators report. This report revealed gross company operating profits lifted 1.7% in the March quarter, following a revised 2.8% increase in the December quarter. The annual rate of growth stepped down from 10.5%, but remained relatively firm at 7.8%. Much of the growth in profits was driven by the mining sector. Mining profits jumped 5.2% in the March quarter, increasing for the sixth consecutive quarter, helped by a bounce in bulk commodity prices.

Other sectors, however, did not perform so well in the quarter. Indeed, non-mining profits fell 0.4%, the weakest in three quarters. The step down in non-mining profits is being reflected in weaker business conditions and business confidence.

The wages & salaries component of the report rose by 1.1% in the March quarter and annual growth lifted to 4.4%, which was the firmest in 3 quarters.

Thirdly, there was job-advertisements data. Job ads plunged 8.4% in May, which is the biggest monthly decline since the GFC. It suggests employment growth should slow in coming months. However, some caution is warranted around the result due to the timing of Easter, Anzac Day and the Federal election. Further, this series does not include job ads on linkedin, an application that is increasingly used by recruiters.

Finally, the Melbourne Institute’s inflation gauge for May was flat, after 0.2% growth in April. The annual inflation rate edged a touch lower in May to 1.7%, from 1.8% in May.

China: The Caixin purchasing managers’ index (PMI) for manufacturing stayed at 50.2 in May from the previous month. The Caixin measure is a private gauge and points to possible firmness in the manufacturing sector. It contrasts with official data (published last week) that suggests a cooling in manufacturing growth.

Europe: The Markit manufacturing PMI was unrevised at 47.7 in the final estimate for May, confirming a below 50 reading for 4 consecutive months. It is continuing to suggest sluggish activity in the euro zone.

Japan: Capital spending rose by 6.1% in year to the first quarter, beating consensus forecasts for a rise of 2.6%. The Ministry of Finance also said that company profits soared 10.3% in the year to the March quarter, after sinking 7.0% in the December quarter.

United States: St. Louis President James Bullard said "a downward policy rate adjustment may be warranted soon" to prop up inflation, citing in part the effects of the trade war. It's the first time a US. central bank official has publicly suggested easing since policy was put on hold in January. Bullard, a firm dove, is an FOMC voter this year.

The ISM manufacturing index fell to 52.1 in May, from 52.8 in April. The outcome was below market expectations but remains above the key 50.0 level that suggests an expansion in activity is likely. There was a rebound in the new orders and export orders components of the survey also, which also suggests production should firm.

Construction spending was flat in April, after edging up just 0.1% in March.


Today’s key data and events:

NZ Terms of Trade Q1 exp 0.5% prev -3.0% (8:45am)

AU Balance of Payments Q1 (11:30am)

   Current Account Balance exp -$3.5bn prev -$7.2bn

   Net Exports of GDP exp 0.3 ppt prev -0.2 ppt

AU Retail Sales Apr exp 0.2% prev 0.3% (11:30am)

AU RBA Cash Rate Decision exp 1.25% prev 1.50% (2:30pm)

EZ Unemployment Rate Apr exp 7.7% prev 7.7% (7pm)

EZ CPI Core May Advance y/y exp 0.9% prev 1.3% (7pm)

AUD RBA Governor Lowe Speech at Board Dinner (7:30 pm)

US Factory Orders Apr exp -1.0% prev 1.9% (12am)

US Durable Good Orders Apr Final prev -2.1% (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