Bank of Melbourne

Morning Report

Main Themes: Expectations of monetary easing were supportive of share markets and brought down bond yields. The RBA delivered an expected cut to official interest rates yesterday. Despite the decision, the AUD rose.


Main Themes: Expectations of monetary easing were supportive of share markets and brought down bond yields. The RBA delivered an expected cut to official interest rates yesterday. Despite the decision, the AUD rose.

Share Markets: US shares climbed higher. While it might reflect relief from Trump and Xi’s agreement over the weekend,  expectations of monetary easing is also supporting share markets. The Dow and S&P500 both rose 0.3%, while the S&P500 closed at a new record high.   

Interest Rates: Yields on US treasuries fell, particularly following the release of weak US manufacturing data overnight. US 10-year yields fell 5 basis points to 1.97%. Markets are continuing to fully price in a Fed rate cut at its next meeting on July 30-31.

Foreign Exchange: The US dollar index edged lower likely reflecting US growth concerns and the prospect of a reduction in interest rates by the Fed. Sterling weakened, following cautious comments from BoE Governor Carney. The Australian dollar only dipped temporarily after the RBA decision to lower official interest rates, but rose thereafter. AUD also took another step up after Governor Lowe’s comments last night, touching 70 US cents briefly. The decision to lower rates was widely anticipated by markets. While the RBA signalled it stood ready to provide more easing, yesterday’s comments suggested a pause.

Commodities: OPEC and allies have agreed to extend cuts to oil output until March 2020. However, markets largely anticipated the move – oil prices fell, suggesting concerns over demand are overwhelming the news of production cuts. Gold prices rose on expectations of easing by central banks globally.

Australia: The Reserve Bank (RBA) delivered its second rate cut of 25 basis points this year yesterday, taking the cash rate to a new record low of 1.00%. We expect at least one more rate cut from the RBA in coming months and there is a growing risk that a fourth rate cut will be needed if the unemployment rate does not improve sufficiently.

Our central forecast remains for the RBA to pause for breath in August. We are still comfortable with this forecast, especially as the RBA inserted the words “if needed” when referring to adjusting future policy. These words hint at a possible pause by the central bank next month.

Thereafter, every month is a live date for the RBA. Our favoured timing for the next move is November, but September becomes more likely if unemployment outcomes disappoint. The odds of a fourth rate cut to 0.50% this year would also shorten.

Despite a backdrop of strong employment growth, the RBA stressed there has “been little inroad into the spare capacity in the labour market recently”. More rate cuts are likely needed to achieve the required tightening in the labour market.

The RBA has now also shone a brighter light on underemployment. as well as unemployment. Underemployment tends to be harder to bring down because it is stickier.

In a speech last night, RBA Governor Lowe reiterated that the Board was “prepared to adjust interest rates again if needed” and that “we will be closely monitoring how things evolve over coming months”. Lowe continued to highlighted the likelihood of further rate cuts, but the comments suggest little urgency in lowering rates again as soon as next month.

Europe: IMF head and former French finance minister, Christine Lagarde has been chosen by EU leaders to be the next president of the European Central Bank (ECB). It follows the departure of Mario Draghi in October. German Defence Minister Ursula von der Leyen was selected to replace Jean-Claude Juncker as president of the European Comission.

New Zealand: Building permits jumped 13.2% in May, after declining by 7.9% in April.

United Kingdom: Bank of England (BoE) Governor Carney struck a more cautious tone, indicating that a global trade war and a no-deal Brexit were growing risks to Britain’s economy.

Economic data underscored weakness in current activity. The Markit/CIPS Construction PMI deteriorated from 48.6 in May to 43.1 in June, the lowest reading since 2009.

Meanwhile, house prices rose 0.1%, and the annual pace slow from 0.6% to just 0.5%, as Brexit concerns weigh on demand.

United States: The ISM manufacturing index fell from 52.1 in May to 51.7 in June, the lowest since 2016. It highlights a growing risk that trade tensions will weigh on manufacturing activity at a time when the US economy was losing momentum.

Cleveland Fed president Mester said that she had reservations about a cut to official interest rates at the Fed’s next meeting on July 30-31. Mester said that it wasn’t clear “how effective this policy would be” and could “reinforce negative sentiment”. Mester is a non-voting member of the Fed’s rate setting committee this year.


Today’s key data and events:

NZ QV House Prices Jun y/y prev 2.3% (3am)

AU Perf of Services Index Jun prev 52.5 (8:30am)

AU Building Approvals May exp -2.5% prev -4.7% (11:30am)

AU Trade May exp $5.4bn prev $4.9bn (11:30am)

CH Caixin PMI Composite Jun prev 51.5 (11:45am)

CH PMI Services Jun exp 52.6 prev 52.7 (11:45am)

UK Markit Services PMI Jun exp 51.0 prev 51.0 (6:30pm)

US Markit Composite PMI Jun exp 51.0 prev 50.9 (6:30pm)

US ADP Employment Jun exp 140k prev 27k (10:30pm)

US Trade May exp –US$54.0bn prev –US$50.8bn (10:30pm)

US Initial Jobless Claims w/e Jun 29 exp 223k prev 227k (10:30pm)

US Services PMI Jun Final exp 50.7 prev 50.7 (11:45pm)

US Composite PMI Jun Final prev 50.6 (11:45pm)

US Factory Orders May exp -0.6% prev -0.8% (12am)

US Dur. Good Orders May Final exp -1.3% prev -1.3% (12am)

US ISM Non Mfg Index Jun exp 56.0 prev 56.9 (12am)

Janu Chan, Senior Economist