Bank of Melbourne

Morning Report

Main Themes: US-Iran geopolitical tensions influenced financial markets together with stronger-than-expected outcomes on Eurozone business activity survey data and US home sales.
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Main Themes: US-Iran geopolitical tensions influenced financial markets together with stronger-than-expected outcomes on Eurozone business activity survey data and US home sales.

Share Markets: Stocks finished down Friday, but held on to most of the week's gains following reports that US President Trump rescinded a planned airstrike on military installations in Iran and after the US Commerce Department banned five more Chinese entities from buying US electronics components. The Dow Jones Industrial Average, which at one point traded above its 3 October 2018 record close, ended down 34 points (or -0.1%). The S&P 500, one day after posting a record closing high, briefly hit an intraday peak, before also finishing down 0.1%.

Interest Rates: Stronger-than-expected data on US home sales helped drive US bond yields higher in Friday’s trading session. US 2-year bond yields closed up 5 basis points and US 10-year bond yields finished 6 basis points higher.

Foreign Exchange: The US dollar fell on Friday to three-month lows against a basket of currencies on market expectations the US Federal Reserve would start lowering interest rates. The US dollar has now fallen for three straight sessions after the US Federal Reserve signalled a possible easing later this year. The greenback’s weakness helped propel EUR/USD to a three-month high. The euro was also buoyed by business-activity survey data. Meanwhile, the Japanese yen rose to a five-month high versus the dollar on growing tensions between Iran and the US. The Australian dollar was modestly higher versus the US dollar, also supported by stronger gold prices. However, AUD/USD traded in a very narrow range of 0.6900-0.6938.

Commodities: Gold prices surpassed US$1,400 an ounce on Friday to reach a high of US$1410.78 an ounce, before retreating to close just shy of US$1400 an ounce. Gold has been boosted by the recent break of a key resistance level of US$1350 an ounce and a US Federal Reserve opening the door to possible rate cuts. Gold prices have also found support from worries about a potential US military strike against Iran and a global trade conflict.

Australia: There was no major economic data released on Friday domestically.

Europe: The Markit composite purchasing managers’ index (PMI) for the Eurozone region rose to 52.1 in June, according to the preliminary ‘flash’ estimate, up from 51.8 in May. The result is the highest since last November. The reading also puts growth in the second quarter up slightly on that seen in the first quarter, yet still the second-lowest since the fourth quarter of 2014.

The details behind the headline numbers also provide cause for some concern. First, growth trends between the core and the periphery have widened; Germany and France are both showing improved performances, but the rest of the region is sliding closer towards stagnation. Another concern is that growth remains very much dependent on the service sector, which remains susceptible to a broadening out of the manufacturing downturn. Service providers reported the sharpest rise in business activity since November of last year. In contrast, manufacturing remained in decline, rounding off a quarter in which production suffered the sharpest decline for six years. Such sustained growth of service sector output at a time of manufacturing decline is unprecedented in the survey's history, raising questions over just how long the divergence can last.

Japan: Japan’s key inflation gauge edged lower in May, adding to pressure on the Bank of Japan, which faces a strengthening yen and expectations that price gains will weaken further. Consumer prices excluding fresh food rose by 0.8% in May from a year earlier, with weaker gains in electricity prices among the largest factors slowing inflation.

A separate private survey showed manufacturing activity contracted again in June, as new orders fell at the fastest pace in three years. The Markit manufacturing PMI fell 0.3 of a point to 49.5 in June.

United States: Existing home sales rose by 2.5% to an annual rate of 5.34 million units in May, boosted by lower interest rates for mortgages. April's sales pace was also revised slightly higher to 5.21 million. The outcome beat market consensus expectations that forecast a rise to 5.25 million units. On a year ago, however, existing home sales are still contracting. Existing home sales dropped 1.1% from a year ago, representing the 15th straight year-on-year decrease in home sales.

The Markit flash composite PMI dropped to 50.6 in June, from 50.9 in May, which signalled the weakest expansion of business activity for over three years (i.e. 40 months). Indeed, private-sector output growth has lost momentum in each month since February.  Survey respondents commented on less favourable domestic economic conditions and a tendency for greater risk aversion among some clients.

The Markit services business activity index fell to 50.7 in June, from 50.9 in May, and is at a 40-month low – similar to the composite output index.

Meanwhile, the Markit manufacturing PMI also fell in June, to 50.1, from 50.5. June’s reading is the lowest in nearly ten years.

In geopolitical news, US President Trump said on Sunday he was not seeking a war with Iran after a senior Iranian military commander warned any conflict in the Gulf region could spread uncontrollably and threaten the lives of US troops. Tensions remain high between Iran and the United States after Trump said on Friday that he called off a military strike to retaliate for Iran's downing of an unmanned US drone out of concern it would have been a disproportionate response. US Secretary of State Mike Pompeo repeated to reporters on Sunday that Washington wanted talks with Iran. Pompeo also said that "significant" sanctions on Iran (to be announced tonight) would be aimed at further choking off resources that Iran uses to fund its activities in the region. Last year Trump withdrew the US from a 2015 accord between Iran and world powers that curbed Tehran's nuclear program in exchange for easing sanctions. Relations in the region have worsened significantly since then.

 

Today’s key data and events: 

NZ Credit Card Spending May prev 4.5% (1pm)

US Chicago Fed Nat. Activity Index May exp 0.10 prev -0.45 (10:30pm)

 

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