Bank of Melbourne

Morning Report

Main Themes: US share markets rose with the S&P500 making a fresh record high. US bond yields finished higher, but were depressed for much of the session, and the US dollar faced selling pressures. Oil surged after Iran shot down a US navy drone.

Main Themes: US share markets rose with the S&P500 making a fresh record high. US bond yields finished higher, but were depressed for much of the session, and the US dollar faced selling pressures. Oil surged after Iran shot down a US navy drone.

Share Markets: Share markets were a sea of green overnight. The US Dow Jones rose by 249 points (or +0.9%) and the S&P 500 index lifted by 28 points (or +1.0%) to a new record high. Expectations of rate cuts are helping to prop up demand for equities.

Interest Rates: US interest rates remained depressed. US 10-year treasury yields probed a three-year low of 1.97% and US 2-year yields probed 1.69%. Expectations for rate cuts from the US Federal Reserve and Iran tensions helped encourage investor demand for safe-haven bonds (yields move inversely to price). Both yields, however, recovered modestly to close the overnight session higher. Interest-rate markets are now pricing 34 basis points of easing at next month’s Fed meeting. A total of four rate cuts are priced by the middle of next year.

Australian 3-year government bond yields ranged between 0.87% and 0.90%. Australian 10-year yields between a record low of 1.28% and 1.32%. Interest-rate markets are pricing a 75% chance of an RBA rate cut next month.

Foreign Exchange: The Australian dollar extended a two-day rally from USD0.6884 to reach an overnight high of 0.6936. A weaker US dollar helped the AUD rise together with the lift in iron ore prices.

Commodities: Crude oil futures jumped overnight following news of a US drone shooting by Iran. Spot iron ore gained 2.6% to a five-year high of US$117.40 after Rio Tinto’s cut to output guidance intensified concerns about global supply.

Australia: The Reserve Bank of Australia (RBA) Governor Lowe gave a speech yesterday in Adelaide titled “The Labour Market and Spare Capacity”. The tone of his speech indicated that further rate cuts remain on the table. Lowe suggested that it is “not unrealistic” to expect a further reduction in the cash rate and it is “unrealistic” to expect one rate cut of 25 basis points to alter the growth path. Lowe further said that recent data suggests we are not making any inroads into economy's spare capacity. Indeed, Lowe added that there was considerable spare capacity in the labour market, despite strong jobs growth. The RBA board next meets on July 2. This meeting remains live for another rate cut.

Europe:  Consumer confidence deteriorated to minus 7.2 in June, from minus 6.5 in May.

Japan: The Bank of Japan (BOJ) held their policy meeting yesterday. The BOJ kept policy steady.  Indeed, the BOJ opted not to follow the US Federal Reserve and the European Central Bank in telegraphing any greater preparedness to ease monetary policy. The BOJ made no material change to its policy statement and Governor Kuroda reiterated previous language that the BOJ will take the necessary steps to maintain the momentum to reach its inflation target, while considering the costs and benefits of any additional easing.

In terms of data, the all industry activity index rose by 0.9% in April, after sliding 0.3% in March. The final reading for machine orders showed a drop of 27.3% in the year to May.

New Zealand: GDP expanded 0.6% in the March quarter, leaving the annual growth rate steady at a five-year low of 2.5%. The quarterly rate of growth was faster than projected by the Reserve Bank of NZ (RBNZ) in its May policy statement, led by a jump in construction. The weak growth outcome leaves the door open for further easing from the RBNZ after cutting the official cash rate (OCR) last month.

United Kingdom: The Bank of England’s Monetary Policy Committee (MPC) left the bank rate unchanged at 0.75%. The decision was unanimous. There was little evidence the MPC is about to cut interest rates. Despite acknowledging a deterioration in global growth prospects, declining bond yields and increased Brexit uncertainties (which have lowered Q2 growth expectations), the MPC still see consistency with the projections from the May inflation report. Household income and demand remain firm and are seen to offset weak business investment. There are still concerns around a no-deal Brexit, but if it proves to be smooth, the BoE still expect rates will need to rise.

In terms of data, retail sales fell 0.3% in May when excluding auto fuel. It follows a similar-sized decline in April. The annual growth rate of retailing slowed to 2.2% in May, from 4.7% in April.

United States: The number of people who applied for unemployment benefits in mid June fell to a one-month low and clung near the lowest level in decades. Initial jobless claims fell by 6k to 216k in the week ended June 15. The more stable monthly average of new claims edged up by 1k to 218.75k.

Jobless claims have drifted higher after briefly dipping below 200k in early April for the first time since 1969. They are still extremely low by historical levels, but they are being watched more closely given a slower pace of hiring and weaker US growth.

The Philadelphia Fed index of manufacturing tumbled to 0.3 in June, from 16.6 in May. This reading was the lowest since February. Lower prices contributed to the index’s sharp drop. New orders, shipments and employment also fell.

The current account deficit narrowed to $130.4 billion in Q1, after ballooning to the widest since 2008.

Finally, the leading index was flat in May, after edging 0.1% higher in April.


Today’s key data and events: 

AU PMI Manufacturing prev 51.0 (9am)

AU PMI Services prev 51.5 (9am)

AU PMI Composite Index prev 51.5 (9am)

JN CPI May y/y exp 0.7% prev 0.9% (9:30am)

JN Markit PMI Manufacturing Jun prev 49.8 (10:30am)

EZ Markit PMI Manufacturing Jun exp 48.0 prev 47.7 (6pm)

EZ Markit PMI Services Jun exp 53.0 prev 52.9 (6pm)

EZ Markit PMI Composite Jun exp 52.0 prev 51.8 (6pm)


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