Bank of Melbourne

Morning Report

Main Themes: This week’s US Federal Reserve meeting looms large. US retail sales data on Friday was encouraging, but Broadcom’s announcement highlighted the impact of the US-China trade war.

Main Themes: This week’s US Federal Reserve meeting looms large. US retail sales data on Friday was encouraging, but Broadcom’s announcement highlighted the impact of the US-China trade war.

Share Markets: US equity indices ended lower on Friday, as investors were cautious heading into this week’s Federal Reserve meeting. Moreover, a warning from Broadcom Inc of a broad weakening in global demand weighed on chipmakers added to US-China trade worries. Shares of Broadcom Inc fell 5.6% on Friday after it cut its full-year revenue forecast by $2 billion, blaming the US-China trade conflict and export curbs on Huawei Technologies Co Ltd. Other chipmaker companies, which source product from China and/or export heavily to China, dropped sharply. The Philadelphia Semiconductor index tumbled 2.6%. Meanwhile, the Dow Jones closed 0.1% weaker and the S&P 500 index finished 0.2% lower.

Interest Rates: US 10-year treasury yields rose from 2.06% to 2.11% in response to the strong retail sales data, but retraced and finished at 2.08% after the subdued inflation expectations data. US 2-year yields rose from 1.80% to 1.88% before retracing and closing at 1.85%. Markets are pricing a 100% chance of a Fed fund rate cut by July. A total of three rate cuts are priced by November.

Australian 3-year government bond yields slipped from 1.00% to 0.98% and 10-year yields ranged between 1.37% and 1.40%; both maturities fell to fresh record lows. Markets are pricing a 60% chance of an RBA rate cut next month.

Foreign Exchange: The US dollar index recorded a firm appreciation on Friday, underpinned by US data. The US dollar is also higher over the week. AUD/USD fell from 0.6905 to 0.6858 – the lowest since January.

Commodities: Middle-east tensions continue to prop up the world oil price. Iron ore futures rose to a multi-year high of US$107 a tonne before closing lower on Friday.

Australia: There was no major economic data published on Friday.

China: Data released Friday showed a slower pace of growth. Industrial production expanded 5.0% in the year to May compared to an annual pace of 5.4% in the previous month. It is the weakest pace since 2002, highlighting the headwinds the Chinese economy is facing as it grapples with a trade war with the US. Retail sales grew 6.0% year-on-year in May compared with 6.2% in the previous month, but a longer May Day holiday is likely to have propped up the result. The surveyed jobless rate stayed steady at 5.0% in May.

New Zealand: House sales contracted 7.8% in the year to May, according to REINZ data. The outcome is an improvement from the 11.5% fall recorded in April. In other data, the manufacturing purchasing managers’ index (PMI) published by BusinessNZ eased to 50.2 in May, from 52.7 in April. An outcome above 50.0 indicates activity will expand in the months ahead.

United States: Retail sales rose 0.5% in May, after a rise of 0.3% in April, and only slightly below the consensus estimate. Gains were broad based; eleven among thirteen categories grew in May.

Core retail sales (excludes volatile items) also lifted by 0.5% in May and the previous month was revised to show a 0.4% lift from a flat outcome previously.

There was expansive strength across discretionary categories, which demonstrates consumers’ willingness to spend, supported by tight labour market conditions and reasonable income gains.

With two months of data in hand, annualised growth in Q2 shows an acceleration to 6.7% from a meagre 0.3% in Q1. This points to a solid contribution from consumer spending to overall GDP growth in the second quarter.

Industrial production rose 0.4% in May, beating market consensus for a rise of only 0.2% and despite headwinds from a stronger US dollar and trade wars. Industrial production is still down 2.1% annualised year-to-date, but up 2.0% from year ago levels. The health of the factory sector continues to be fragile, however, the report highlights the industry is not deteriorating and continues to be supported by solid domestic demand.

The University of Michigan measure of consumer sentiment showed a drop to 97.9 in June, from 100.0 in May. The result was weaker than expected and indicates that there are more pessimists about the economic outlook. The expectations index was particularly weak, falling from 93.5 to 88.6. The current conditions index was elevated at 112.5 in May.

The 5-10 year inflation expectations index notably fell to a 40-year low of 2.2% in June, from 2.6% in May.


Today’s key data and events:

NZ Performance of Services Index May prev 51.8 (8:30am)

UK Rightmove House Prices Jun prev 0.9% (9:01am)

EZ Labour Costs Q1 y/y prev 2.3% (7pm)

US Empire Mfg Index Jun exp 11.0 prev 17.8 (10:30pm)

US NAHB Housing Market Index Jun exp 67 prev 66 (12am)

US Net Long-Term TIC Flows Apr prev –$28.4bn (6am)


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