Bank of Melbourne

Morning Report

Main Themes: Middle-east tensions rose overnight, causing a spike in oil prices. US share markets still finished higher. US Treasury yields fell and the US dollar is little changed.


Main Themes: Middle-east tensions rose overnight, causing a spike in oil prices. US share markets still finished higher. US Treasury yields fell and the US dollar is little changed.

Share Markets: US share markets halted a two-day decline with the S&P 500 hitting a five-week high. The S&P 500 share market index finished the session 12 points higher (or +0.4%) and the Dow Jones closed up 102 points (or +0.4%).

Interest Rates: Caution over trade and Middle-east tensions prevailed, sending Treasury yields in the US lower. US 2-year yields closed down 4 basis points and US 10-year yields finished 5 basis points weaker.

Interest-rate markets are pricing a 100% chance of a Fed fund rate cut by July (was 90% yesterday) with a total of three cuts priced by December.

Australian 3-year government bond yields preserved yesterday’s jobs data-led decline, ranging around 1.01%. Australian 10-year yields around 1.41% - both record lows. Markets are pricing a 60% chance of an RBA rate cut at the July meeting.

Foreign Exchange: The US dollar index is unchanged on the day. EUR/USD slipped from 1.1300 to 1.1270, as data showed industrial production weakened further in the Eurozone region. USD/JPY ranged sideways between 108.15 and 108.55. AUD/USD preserved yesterday’s jobs data-led losses, ranging between 0.6902 and 0.6937. NZD/USD slipped further, from 0.6575 to 0.6556. AUD/NZD retraced yesterday’s decline, from near 1.0505 to 1.0545.

Commodities: Oil spiked on the wake of two attacks on two oil tankers near the Persian Gulf. The WTI price for oil surged as much as 4.5% from a five-month low before paring gains. OPEC also cut its first-quarter demand growth estimate to less than
1 million barrels a day as the trade war hurt economic growth. The cartel kept its 2019 estimate mostly unchanged, saying consumption will accelerate the rest of the year.

Meanwhile, safe-haven buying pushed up the price of gold.

Australia: The strength of jobs growth is continuing to surprise to the upside. Employment growth recorded a solid gain of 42.3k in May, which was the second consecutive increase in excess of 40k. Annual growth in jobs pushed up from 2.5% in April to 2.9% in May, the strongest in over a year and despite soft economic growth since the middle of last year. The bulk of the job gains were concentrated in part-time work, lifting 39.8k, in May. Full-time jobs edged up just 2.4k in the month.

The impact of the Federal election could have boosted part-time job growth in May, but to a limited extent given that the reference period for this month’s survey was prior to the Election Day. Even if there were some one-off impacts, we cannot ignore the long-run trend of persistently strong employment gains in the face of weaker economic activity.

The unemployment rate held steady at 5.2% and was again propped up by rising workforce participation. The participation rate rose 0.1 percentage points to 66.0% - a new record high.

The RBA has brought into focus the labour market in guiding its decisions on monetary policy. RBA policymakers would be encouraged by the strength of employment growth, but its attention is on the unemployment rate. The RBA has said that the unemployment rate could and should be lower. Yesterday’s data does not alter our view that the RBA will lower the cash rate another two times this year.

China: Foreign investment grew by 8.5% in the year to May, from 6.3% in the previous period.

Europe: Industrial production fell by 0.5% in April, after a downwardly revised 0.4% decline in March. This data underscores the fragility of economic growth in the Eurozone economy.

Japan: The Finance Ministry’s quarterly business survey showed a reading of minus 10.4 for conditions among Japan’s biggest manufacturers, the largest drop since June 2016. Sentiment among small-sized firms dropped the most and has been negative for more than 5 years while medium-sized firms registered the second consecutive monthly decline. . This data adds to signs that weakening overseas demand is hitting Japan’s export-dependent economy.

United Kingdom: The initial Conservative leadership ballot among sitting MPs, and so selection of a new PM, has reduced the contenders to seven. Boris Johnson is well ahead of the field with votes from 114 MPs (Hunt 43, Gove, 37, Raab 27, Javid 23, Hancock 20 and Stewart 19). The next elimination ballot (need at least 10% of voting MPs to avoid being eliminated) will take place on Tuesday, followed by further eliminating ballots on Wednesday and Thursday until only two candidates remain. They will then be voted upon by the broader Conservative Party over the coming month.

United States: Initial jobless claims, a measure of how many workers were laid off across the US, increased 3k to 222k in the week ended June 8. Estimates of claims are volatile week to week and often revised. A separate measure—the 4-week moving average, which shows the trend over the past month—rose 2.5k to 217.8k.

Initial jobless claims have now risen for three consecutive weeks, though the gains have been modest. Despite the growth, claims remain exceptionally low by historical standards. The labour market appears healthy overall, though recent reports have sent mixed signals about whether the market is strengthening or slightly weakening.

In other data, import prices dropped 0.3% in May, the biggest decline since last December. Data for April was revised down to show import prices rising 0.1% instead of climbing 0.2% as previously reported. The report also showed export prices fell 0.2% in May after nudging up 0.1% in April. Export prices fell 0.7% on a year-on-year basis in May after gaining 0.2% in April. Soybean prices tumbled 20.6% year on year.

The US blamed Iran for attacks on two oil tankers near the Persian Gulf, further raising the risk of a military conflict. Iranian Foreign Minister Javad Zarif suggested his country's enemies may be culpable and reiterated calls for regional dialogue.

Today’s key data and events:

NZ REINZ House Sales May y/y prev -11.5% (7am)

NZ BusinessNZ Manufacturing PMI May prev (8:30am)

JN Industrial Production Apr Final prev 0.6% (2:30pm)

CH Retail Sales May y/y exp 8.1% prev 7.2% (5pm)

CH Industrial Production May y/y exp 5.4% prev 5.4% (5pm)

CH Fixed Assets Ex Rural May YTD y/y exp 6.1% prev 6.1% (5pm)

CH Property Investment May YTD y/y prev 11.0% (5pm)

CH Surveyed Jobless Rate May prev 5.0% (5pm)

US Retail Sales May exp 0.6% prev -0.2% (10:30pm)

US Industrial Prod’n May exp 0.2% prev -0.5% (11:15pm)

US UoM Cons. Sent. Jun Prel. exp 98.0 prev 100.0 (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 Ph:02-8254-3251