Bank of Melbourne

Morning Report

Main Themes: The US Federal Reserve shifted to an easing bias overnight, opening the door wider to a rate cut this year. Share markets rose, while US bond yields and the US dollar fell.

Main Themes: The US Federal Reserve shifted to an easing bias overnight, opening the door wider to a rate cut this year. Share markets rose, US bond yields fell sharply and the US dollar depreciated.

Share Markets: US share markets traded near record highs overnight, after the US Federal Reserve adopted a more dovish tone. The Dow Jones index lifted by 38 points (or +0.2%) and the S&P 500 index rose by 9 points (or +0.3%).

Interest Rates: US interest rates were particularly sensitive to the FOMC’s dovish shift. US 10-year treasury yields fell from 2.10% to 2.02% and closed 3 basis points lower. US 2-year yields posted an even larger fall of 12 basis points.  Interest-rate markets are now pricing 33bp of Fed easing at the July meeting with a total of four cuts priced by the middle of 2020.

Australian 3-year government bond yields fell from 0.95%% to 0.91% - a record low. Australian 10-year yields down from 1.38% to 1.33%. Interest-rate markets are pricing a 55% chance of an RBA rate cut at the July meeting, but 100% chance for the August meeting.

Foreign Exchange: The US dollar index depreciated in the lead up to the Fed decision and statement. It then weakened further in response to it. AUD/USD initially jumped from 0.6870 to 0.6909 in response to the FOMC, but then retraced to reach an overnight low of 0.6852. We continue to expect the AUD/USD to end this year weaker. The risks for the AUD/USD remain to the downside amid fragile world economic growth.

Commodities: Iron ore investors were whipsawed after news from two industry heavyweights. Vale said it won court approval to reopen its Brucutu mine in Brazil within 72 hours and reaffirmed sales guidance for 2019. These developments are likely to help ease global supply concerns, but then Rio Tinto cut its full-year output target after problems at its operations in Western Australia.

Australia: The WBC leading index fell 0.08% in May. This index is continuing to suggest a growth rate below trend for the remainder of 2019.

Europe:  The current account surplus narrowed from €24.7 billion in April to €20.9 billion in May.

New Zealand: The current account swung back to surplus of $0.675 billion in the March quarter, the largest in three years, although some seasonality boosted exports in the quarter. On a seasonally adjusted basis the current account was steady at $2.6 billion in the March quarter.

United Kingdom: Core consumer prices eased from 1.8% in the year to April to 1.7% in the year to May. In other data, the house price index lifted by 1.4% in the year to May.

United States: The US Federal Reserve Open Market Committee (FOMC) left their key federal funds rate in a range of 2.25% to 2.50%. They also dropped a reference in their accompanying statement to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target this year.

In the statement, the Fed indicated it still expects a strong labour market and inflation to be near its goal but highlighted “uncertainties about this outlook have increased’’. The Fed added that “in light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The statement downgraded their assessment of economic activity to a “moderate” pace from “solid” at their last gathering. However, the growth projection of 2.1% for 2019 was left unchanged.

Inflation projections were downgraded. The Fed cut their personal consumption expenditure (PCE) deflator projection for 2019 to 1.5%, from 1.8% previously. It is their lowest projection for the PCE deflator since December 2016. The forecasts for 2020 were also trimmed to 1.9%, from 2%.

The FOMC vote was not unanimous; St. Louis Fed President James Bullard sought a 25 basis point rate cut. His vote marked the first dissent of Powell’s 16-month tenure as chairman.

Officials were also starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts. If just one more Fed official joined this group in calling for a cut(s) the median for 2019 would have shifted lower. The median for 2020 did shift; the median now shows a 25bp cut, which is a turnaround from the 50bp hike that was projected back in March.


Today’s key data and events: 

NZ GDP Q1 exp 0.6% prev 0.6% (8.45am)

AU RBA Governor Lowe Speaks (12.35pm)

JN BoJ Monetary Policy Meeting (~)

UK Retail Sales May exp -0.5% prev 0.0% (6.30pm)

UK BoE Bank Rate exp 0.75% prev 0.75% (9pm)

US Philadelphia Fed Index Jun exp 10.7 prev 16.6 (10.30pm)

US Leading Index May exp 0.1% prev 0.2% (12am)

EZ Consumer Confidence Jun exp -6.5 prev -6.5 (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