Bank of Melbourne

Morning Report

Main Themes: Remarks from US Federal Reserve Chair Powell and US Federal Reserve committee member Bullard were less dovish than markets anticipated. These remarks sent stocks lower, bond yields higher (briefly) and underpinned demand for the US dollar. Markets also looked ahead to the G20 meeting later this week, but overnight news suggested no US-China trade deal is likely from this meeting.
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Main Themes: Remarks from US Federal Reserve Chair Powell and US Federal Reserve committee member Bullard were less dovish than markets anticipated. These remarks sent stocks lower, bond yields higher (briefly) and underpinned demand for the US dollar. Markets also looked ahead to the G20 meeting later this week, but overnight news suggested no US-China trade deal is likely from this meeting.

Share Markets: US share market bourses fell as comments from Federal Reserve Chair Powell and Federal Reserve Committee member Bullard did little to soothe concerns over growth and trade friction. Tech shares led losses. The Dow Jones closed 179 points lower (or -0.7%) and the SP 500 index ended down 28 points (or -1.0%). The Nasdaq shed 121 points (or -1.5%).

Interest Rates: US 2-year treasury yields jumped from 1.70% to 1.76% on the back of comments made by US Federal Reserve Chair Powell and Federal Reserve member Bullard, but settled at 1.73%. The US 10-year yield extended its downward trend to close 3 basis points lower at 1.99%. Interest-rate markets are pricing 33 basis points of easing at the July meeting (was 36 basis points yesterday). A total of four rate cuts in the US are priced by the middle of 2020.

Australian 3-year government bond yields ranged sideways between a record low of 0.85% and 0.87%. Australian 10-year yields grinded lower from 1.30% to a record low of 1.27%. Interest-rate markets are pricing an 80% chance of an RBA rate cut at next week’s RBA board meeting. We also expect the RBA will cut the cash rate at this meeting.

Foreign Exchange: The US dollar index recovered some ground overnight, aided by remarks from Federal Reserve officials. EUR/USD fell from 1.1410 to an overnight low of 1.1344 due to the stronger greenback and USD/JPY rose from 106.80 to 107.40.

The Australian dollar is little changed at 0.6960, after initially extending a week-old rally to 0.6978, and then falling to 0.6942 on the comments from Powell and Bullard. 

The AUD/USD price action has been a lot more mixed in recent weeks, after having tumbled from near USD0.7200 since mid April to a low of 0.6853 in mid June. Iron ore prices at 5-year highs and gold prices at 6-year highs have provided some support to the AUD. Moreover, record short Australian dollar positions by real money accounts in futures markets suggest plenty of bad news has already been priced in for the AUD. These factors may limit the downside for the AUD/USD exchange rate in the near term.

Commodities: Gold continued to rise, reaching a fresh six-year high of US$1439 an ounce. The rally in gold shows no convincing signs of abating.

Australia: There was no major economic data released yesterday domestically.

New Zealand: The trade surplus narrowed from NZ$383 million in April to NZ$260 million in May. Exports rose by 4.2% in May, led by gains in dairy and forestry. A rise in dairy product prices outweighed a fall in volumes. Meanwhile, imports rose by 1.4%. Fuel import volumes were relatively high for the month and imports of capital equipment picked up a little after a drop in April. The annual deficit improved slightly to just under NZ$5.5 billion. We expect a modest further improvement in the coming months, as the rise in dairy prices earlier this year continues to flow through into the export figures.

United States: New home sales fell by 7.8% in May, after a fall of 3.7% in April. The sharp fall in May was partly offset by upward revisions to previous months, but even so the US housing industry is struggling to regain a steady recovery path, despite a large fall in mortgage rates.

Dated data on house prices was also released overnight. CoreLogic house prices were flat in April, after a rise of 0.1% in March, and annual growth eased to 2.54%. FHFA house prices rose 0.4% in April, after a rise of 0.1% in March.

Consumer confidence plunged in June by 9.8 points to 121.5 to be at its lowest level in nearly two years. Both current conditions and expectations recorded large declines with consumers’ assessment of the labour market registering a notable deterioration.

The Richmond Fed manufacturing index did not buck the trend revealed in the other Fed regional surveys already published; it showed a deterioration in the month. The Richmond Fed index fell to +3 in June, from +5 in May.

Federal Reserve Chair Powell reiterated his comments from the previous Federal Reserve meeting that the Fed is closely monitoring developments and will act as appropriate to sustain the economic expansion. However, Powell added that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Fed dove Bullard said it’s a good time for an insurance rate cut, but did not think a 50 basis point cut was necessary. Bullard favours a 25-point reduction as "insurance" given below-target inflation and slowing growth.

On trade news, media reports have cited familiar sources as saying the US will not accept conditions on tariffs as part of renewed negotiations between China and the US and no deal is expected from the upcoming G20 meeting.

 

Today’s key data and events: 

NZ RBNZ Official Cash Rate Review exp 1.50% prev 1.50% (12pm)

UK Housing Finance May exp 41000 prev 42989 (6:30pm)

US Dur. Goods Orders May exp -0.3% prev -2.1% (10:30pm)

US Adv Goods Trade May exp -$71.9bn prev -$72.1bn (10:30pm)

US Retail Inventories May exp 0.3% prev 0.5% (10:30pm)

US Wholesale Inventories May exp 0.5% prev 0.8% (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