Bank of Melbourne

Morning Report

Main Themes: On Friday, markets were mostly optimistic for an agreement on trade between China and the US over the weekend. Shares were higher, along with the Australian dollar, although bond yields were relatively unchanged. Sentiment could receive a further boost today with the news that trade discussions will restart.
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Main Themes: On Friday, markets were mostly optimistic for an agreement on trade between China and the US over the weekend. Shares were higher, along with the Australian dollar, although bond yields were relatively unchanged. Sentiment could receive a further boost today with the news that trade discussions will restart. 

Share Markets: There were hopes of a positive outcome ahead of the G20 meeting over the weekend and from trade talks between Trump and Xi. The Dow rose 0.3%, while the S&P500 rose 0.6%. The technology sector had the most to gain from a deal. The Nasdaq rose 0.5%. 

Interest Rates: Yields on US treasuries were relatively unchanged ahead of the highly-anticipated talks over the weekend. US 10-year yields lifted from 2.01% to 2.03%, but then retreated back to end the session at 2.01%.

Foreign Exchange: The US dollar was also broadly unchanged. The Australian dollar extended a climb over Friday, on hopes ahead of the US-China trade discussions.    

Commodities: Oil prices weakened on Friday, but finished the week higher. Hopes ahead of the trade talks between the US and China and expectations of production cuts from OPEC on Monday have been supportive of oil prices. Prices of most other commodities were steady ahead of this weekend.  

Global: The US and China agreed to restart trade talks over the weekend. The truce will stop additional tariffs imposed on the remaining $300 billion worth of Chinese imports. There was also a consideration to take Huawei off the list of firms banned from buying components and technology from US companies.  China also agreed to purchase US farm products. In Trump’s words, “we’re right back on track” and that the meeting with Xi was “far better than expected”.

Australia: Credit to the private sector remained very weak in May, rising 0.2% in the month and 3.6% in the year. It was the weakest annual pace in just under six years. There was weakness on all fronts, including business, housing and personal credit. The weak growth in credit corresponds with the loss of momentum in the domestic economy since the second half of 2018. Some confidence among businesses and households appears to have been restored post the federal election, however, there are some more long-lasting headwinds, including the ongoing global trade tensions, weak income growth and high household debt levels.

China: China’s manufacturing PMI was steady at 49.4 in June, unchanged from May, the fourth reading in six months below 50, signalling contraction. Factory activity is struggling to gain traction since the beginning of the year.

Services activity also eased slightly, although remaining in expansion territory. The PMI services index fell from 54.3 in May to 54.2 in June. Combined, the composite PMI fell from 53.3 to 53.0, the weakest in four months and highlights the likelihood of further stimulus from authorities.

Europe: Inflation in the euro zone was steady at an annual rate of 1.2% in June, and also in line with expectations. Core inflation edged up from an annual rate of 0.8% to 1.1%, which will be an encouraging development for the ECB. However, the uncertain global environment will likely keep the ECB cautious and maintain its message that it is ready to act.

Japan: The jobless rate was steady at 2.4% in May, remaining at near a 26-year low. However, the job-to-applicant ratio fell from 1.63 in April to 1.62 in May. The labour market remains extremely tight, but the higher job to applicant ratio is suggesting that demand for workers is starting to ease.   

Other indicators on economic activity was positive. Industrial production lifted 2.3% in May, which was the strongest in 15 months. The strength in factory activity is despite the uncertain global trading environment. This resilience is despite the sales tax hike due to take effect in October. 

New Zealand: ANZ consumer confidence rose 2.8% in June, rebounding from a six-month low in May. It suggests some resilience among consumers despite weakness in some housing markets and uncertainty globally.

United Kingdom: Consumer confidence deteriorated from -10 in May to -13 in June according to GfK, as the uncertainty from Brexit weighs on the mood of consumers.

In other data, GDP was confirmed at 0.5% in the March quarter in the final estimate, with annual growth at 1.8%. 

United States: Personal incomes and spending grew a moderate pace in May. Incomes grew at 0.5% in the month and 4.1% in the year, providing support to household spending. PCE inflation edged down from a revised 1.6% previously to 1.5% in May, in line with expectations. Core PCE inflation was steady at 1.6%. It was a touch higher than the 1.5% expected, but is continuing to suggest limited upward pressure on inflation.

The MNI Chicago PMI fell from 542 in May to 49.7 in June, the first reading below 50 since January 2017. It adds to a range of regional indicators pointing to a moderation in business activity.  

Consumer sentiment from the University of Michigan was revised upwards from 97.9 to 98.2 in the final estimate for June, down from an eight-month high in May. The fall is unsurprising given trade concerns and a softer global environment but the index remains elevated by historical standards suggesting consumers remain relatively upbeat. 

 

Today’s key data and events: 

AU AiG Perf of Manufacturing Jun prev 52.7 (8.30am)

JN Tankan Large Mfg Index Q2 exp 9 prev 12 (9.50am)

AU CoreLogic Dwelling Prices Jun exp -0.2% prev -0.4% (10am)

JN Markit PMI Mfg Jun final exp 49.5 (10.30am)

AU MI Inflation Jun y/y prev 1.7% (11.00am)

CH Caixin Mfg PMI Jun exp 50.0 prev 50.2 (11.45am)

EZ Markit Mfg PMI Jun final exp 47.8 prev 47.8 (6pm)

EZ M3 Money Supply May y/y prev 4.7% (6pm)

UK Markit Mfg PMI Jun exp 49.2 prev 49.4 (6.30pm)

EZ Unemployment Rate May exp 7.5% prev 7.6% (7pm)

US Markit Mfg PMI Jun final exp 51.2 prev 50.1 (11.45pm)

US ISM Mfg Jun exp 51.2 prev 52.1 (12am)

US Construction Spending May exp 0.0% prev 0.0% (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.

Janu Chan, Senior Economist Ph:02-8253-0898