Bank of Melbourne

Morning Report

Main Themes: Trade tensions remained an ongoing theme. Sentiment improved on hopes of some resolution to the US-Mexico conflict as officials currently meet for talks. Weak US jobs data overnight further supported the case for the Fed to lower rates. Share markets rose and bond yields were little changed. The US dollar recovered, pushing AUD back below 70 US cents.
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Main Themes: Trade tensions remained an ongoing theme. Sentiment improved on hopes of some resolution to the US-Mexico conflict as officials currently meet for talks. Weak US jobs data overnight further supported the case for the Fed to lower rates. Share markets rose and bond yields were little changed. The US dollar recovered, pushing AUD back below 70 US cents.

Share markets: US shares rose on the potential for thawing trade tensions between the US and Mexico. The Dow and S&P500 indices both recovered 0.8%.

Interest Rates: US bond yields dipped on the unexpectedly weak ADP payrolls report, but then lifted later on, reflecting the improvement in market sentiment. US 10-year yields ended 1 basis point higher to 2.13%, although yields remain well down from a week ago. A rate cut from the Federal Reserve is fully priced in by September.

Australian 10-year bond yields once again dropped below 1.50% . Another 25 basis point rate cut from the RBA is priced in by October.

Foreign Exchange: The US dollar temporarily dipped on the weak jobs data, but then rebounded to be higher, probably in reaction to some potential thawing of the US-Mexican trade conflict. It also comes ahead of the European Central Bank (ECB) meeting tonight, which might be keeping euro under downward pressure. The Australian dollar hovered around US 70 cents post the weaker-than-expected GDP release, but was mostly slave to the US dollar, weakening to 69.7 US cents this morning as the US dollar recovered.

Commodities: Oil prices weakened on an unexpected jump in US crude stocks and lingering concerns about the global growth outlook. Gold prices lifted on the potential for lower rates by the Fed.

Global: The IMF warned that the tariffs between China and US could slash global economic output by 0.5% in 2020. Additionally, the IMF cut China’s growth forecasts for 2019 and 2020 to 6.2% and 6.0%, respectively, by 0.1 percentage points each year.

Australia: The Australian economy grew at a slow rate in the early part of this year, after a particularly weak second half of 2018. The weakness in the consumer sector and the impact of the housing downturn are major factors behind the subdued result.

In the March quarter, gross domestic product (GDP) grew just 0.4%. Annual growth stepped down from 2.4% to 1.8%, the weakest annual rate in 9½ years.

Domestic final demand also only eked out a 0.1% gain, which is the weakest quarterly gain since the September quarter of 2016. Prior to yesterday, the last time the RBA cut rates was in this quarter.

Public spending, business investment and the traded sector provided some modest support to economic growth. Household spending provided a small contribution, but dwelling investment and inventories detracted from growth.

Yesterday’s data adds to our expectation the RBA will need to cut further, especially because some parts of the economy are likely to stay weak through this year. Moreover, we expect GDP growth in 2019 to be below trend and undershoot the RBA’s forecasts.

China: The Caixin-Markit services purchasing managers’ index (PMI) dipped to 52.7 in May from the 15-month high of 54.5 recorded in April. The 50-point level separates growth from contraction. New business and new order growth was softer in May.

Europe: The Euro zone services PMI was revised up from 52.5 to 52.9 in the final estimate for May. The composite reading was also revised higher from 51.6 to 51.8, signalling only a minor improvement since the beginning of the year.

United Kingdom: The Markit/CIPS services PMI rose from 50.4 in April to 51.0 in May, the strongest in three months, but was offset by weakness in the construction and manufacturing indices released earlier on. The composite PMI held steady at 50.9 in May.

United States: Employment according to ADP private payrolls disappointed in May, rising just 27k. Expectations were for a 185k increase. The small gain followed a 271k increase in April.

The two different services indices gave mixed signals overnight. The Markit services PMI was unrevised at 50.9 in May, the lowest since early 2016. Meanwhile, the ISM index improved to 56.9 in May from 55.5 in April. Both indices however, point to weaker activity than  over 2018.

The Fed’s Beige book said that the 12 regional districts reported modest growth over April and May and a slight improvement from the previous report.

 

Today’s key data and events:

AU Trade Balance Apr exp $5.4bn prev $4.9bn (11:30am)

EZ GDP Final Q1 prev 0.7% (7pm)

EZ European Central Bank Meeting (9:45pm)

US Trade Apr exp -$50.5bn prev -$50.0bn (10:30pm)

 

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
Ph:02-8253-0898