Bank of Melbourne

Morning Report

Main Themes: Markets cheered after Trump suspended tariffs on Mexico which were due to take effect on Monday. While Trump continued to take aim at China with the threat of tariffs, shares, bond yields and the US dollar rose in relief.

Main Themes: Markets cheered after Trump suspended tariffs on Mexico which were due to take effect on Monday. While Trump continued to take aim at China with the threat of tariffs, shares, bond yields and the US dollar rose in relief.

Share Markets: Relief over the suspension of tariffs against Mexico lifted markets across Asia yesterday which followed into Europe and the US overnight. Gains were likely capped by the lingering trade concerns between the US and China. Nonetheless, retailers, automakers and chipmakers were the big winners overnight. The Dow closed 0.3% higher, and the S&P500 rose 0.5%.

Interest Rates: Yields on US treasuries jumped as the worries regarding the tariffs against Mexico faded. The US 10-year yields lifted 7 basis points to 2.15%.

Foreign Exchange: The US dollar index gained on the deal between the US and Mexico. Additionally, the euro was weighed down by sources that the ECB was open to cutting interest rates. GBP dropped after economic data suggested a hit to activity from Brexit uncertainty. The Australian dollar spiked up to 70.2 US cents on the improvement in risk appetite, but then lost ground in step with the stronger US dollar to be trading at around 69.6 US cents this morning.

Commodities: Commodity prices were weighed down by the higher US dollar. Oil prices were also weighed down by uncertainty over whether Saudi Arabia and Russia would agree to extending cuts to output. Gold prices fell, as risk appetite improved.

Australia: No major releases reflecting Queen’s Birthday Public Holiday.

China: There was a mixed result in Chinese trade data. Imports were weaker than expected, and were down 8.5% in the year to May. It suggests Chinese domestic demand is struggling to regain traction despite fiscal stimulus. Exports were stronger than expected, up 1.1% in the year to May, against expectations for a 3.9% increase. Shipments may have lifted as exporters aim to get ahead of recently-announced tariffs. 

Europe: Media reports indicated that a rate cut was on the cards saying that “if inflation and growth slow, then a rate cut is warranted” according to anonymous sources.

Japan: GDP growth was revised upwards from an annualized 2.1% to 2.2% in the final estimate for the March quarter. While the result was expected, there are downside risks with global trade tensions re-escalating and a scheduled sales tax increase for October.

United Kingdom: Industrial production fell 2.7% in April,  the first drop in four months. There was a particularly sharp drop in manufacturing activity, falling 3.9% in the month. Many car manufacturers were unable to reverse a temporary shutdown in April. The closure was a contingency plan after the UK was originally scheduled to leave the European Union on March 29.  

Construction output was also impacted, contracting 0.4% in April after a 1.9% drop in the previous month.

Bank of England (BoE) policymaker Michael Saunders said that the BoE would probably need to return to a neutral stance earlier than markets project and that the MPS did “not necessarily have to keep rates on hold until all Brexit uncertainties are resolved”. Saunders hawkish stance echoed the BoE’s chief economist over the weekend saying that “the time is nearing when a small rise in rates would be prudent to nip any inflationary risks in the bud”. However, with the global concerns regarding trade tensions and Brexit uncertainty likely to hamper activity, it would seem unlikely that the BoE should be lifting rates any time soon.

United States: On Friday evening, Trump tweeted that “the tariffs scheduled to be implemented by the US on Monday, against Mexico, are hereby indefinitely suspended.” The US and Mexico have said that Mexico agreed to immediately expand a program that sends migrants seeking asylum in the US to Mexico, although Mexico did not accept the US demand that it would take in most Central American asylum seekers.

In the latest on trade tensions with China, Trump threatened to raise tariffs on China if Chinese President Xi did not meet with him at an upcoming G-20 summit later this month. In a TV interview, Trump confirmed that tariffs on $300 billion worth of Chinese goods would be enacted inacted immediately if no meeting went ahead.

Job openings by JOLT fell from 7474 to 7449 in April, but remain at an elevated level suggesting ongoing buoyant labour market conditions. It follows a sharp drop in new jobs in May, in the wake of the recent re-escalation of trade tensions.


Today’s key data and events:

AU NAB Business Conditions May prev 3 (11.30am)

AU NAB Business Confidence May prev 0 (11.30am)

UK ILO Unemployment Rate Apr exp 3.8% prev 3.8% (6.30pm)

UK NFIB Small Business Optimism May exp 102.8 prev 103.5 (8pm)

UK PPI Final Demand May y/y prev 2.2% (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