Main Themes: Sentiment was boosted by positive developments in US and China trade negotiations, sending shares higher. The news was also supportive of the Australian dollar. However, bond yields fell after ECB President Draghi signalled a willingness to provide stimulus.
Share Markets: Share markets were encouraged by the developments over trade with Xi and Trump agreeing to meet. The Dow rose 1.4%, while the S&P500 lifted 1.0%. Tech stocks, which have been negatively impacted by the recent escalation in tensions performed particularly well, with the Nasdaq rising 1.4%.
Interest Rates: Yields on US treasuries fell on the prospect of monetary stimulus after ECB Draghi’s comments. It also comes ahead of a Federal Reserve meeting tomorrow morning. US 10-year yields dropped 3 basis points to 2.06%. Yields on German bunds fell further below zero, with 10-year yields dropping 8 basis points to -0.32%.
Foreign Exchange: Euro weakened on Draghi’s dovish remarks, which boosted the US dollar index. Sterling partially recovered, but is still near 5-month lows after Johnson was confirmed as frontrunner to replace PM Theresa May. The Australian dollar bounced, more than recovering a drop after the RBA signalled more rate cuts were likely on its way in the minutes yesterday. After dipping to below 68.3 US cents after the minutes, AUD rebounded to trade at 68.8 US cents this morning.
Commodities: Commodity prices were boosted by the positive turn on trade. Oil prices and copper prices climbed on the news. Gold prices were supported by expectations of easier monetary policy, but pared gains on the improvement in risk appetite.
Australia: In the minutes of the RBA board meeting in June, the RBA laid the groundwork for further monetary easing. The key highlight was the phrase in the final paragraph - “members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”. Labour market conditions continued to be a key focus for the RBA. Since the RBA’s board meeting in June, the latest release on the labour market in May revealed a steady unemployment rate and ongoing strength in employment growth. The data did not suggest immediate action was required from the RBA. However, the steady unemployment rate is still indicative of a labour market with spare capacity, and confirms the view that the RBA will need to lower official interest rates once again. With downside risks to the economy persisting, including soft consumer spending, a deterioration in business conditions and a more uncertain global outlook, we cannot rule out the possibility the RBA lowering the cash rate at its next meeting in July. Nonetheless, we maintain our view that the RBA will lower rates in August and then again in November.
Residential property prices according to the ABS fell 3.0% in the March quarter, which was the largest quarterly decline since the series began in 2003. However, more timely data, published by CoreLogic is suggesting a lessening in price declines over recent months.
The NSW State government handed down its Budget yesterday. The NSW Government handed down its 2019-20 Budget yesterday. A surplus of $1.0 billion is estimated in 2019-20, and gradually increasing over the next four years. While revenues have been hit by the downturn in the housing market, there continues to be strong spending on infrastructure. Net debt is projected to be negative $7.7 billion in June 2019, with reliance on funding from asset-recycling initiatives.
In South Australia, their State government is expecting a $94 million surplus for 2019-20, and increasing to $251 million in 2022-23. The South Australian Budget was also big on infrastructure spending, including the North-South Corridor.
China: New home prices in China rose 0.7% in May, the strongest increase in five months. On an annual basis, prices were 11.3% higher. The pickup in house price growth highlights a side-effect from an attempt by authorities to boost economic growth given an easing in credit conditions.
Europe: European Central Bank (ECB) president Draghi said that the central bank would ease policy if inflation did not accelerate and that bond purchases, rate cuts or changes to policy guidance were raised and discussed.
In the run of data releases, the ZEW survey indicated expectations for economic growth deteriorated sharply in June. The ZEW expectations index fell from -1.6 to -20.2 breaking four consecutive months of improvement, and the weakest since January.
New Zealand: The Westpac McDermott Miller consumer confidence index fell from 103.8 in the March quarter to 103.5 in the June quarter. It follows a cooling in economic activity, a more downbeat global backdrop and a softening housing market.
United Kingdom: Key Brexit supporter, Boris Johnson, was ahead in the second ballot winning 40% of votes. Johnson has promised to leave the European Union by October 31.
United States: US President Trump took to Twitter to announce that he and Chinese President Xi would “be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting”. Through Chinese state media, Xi confirmed that he agreed that the economic and trade teams of the two countries will maintain communication on how to resolve differences. To reporters, Trump said that “we have a chance” and that “I know that China wants to make a deal”.
Housing starts pulled back from a 6.8% surge in April, falling 0.9% in May. As a trend, activity has moved sideways since the middle of last year, and just below a peak in early 2018. Building permits are suggesting more of the same, lifting 0.3% in May following a 0.2% increase in April.
Today’s key data and events:
NZ Current Account Q1 exp NZ$0.16bn prev –$3.3bn (8.45am)
AU WBC Leading Index May prev -0.1% (10.30am)
UK CPI May y/y exp 2.0% prev 2.1% (6.30pm)
US FOMC Policy Decision exp 2.50% prev 2.50% (4am)
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