Main Themes: US share market bourses rose to fresh record highs and US bond yields fell to multi-year lows.
Share Markets: US share markets marched higher overnight. The Dow Jones closed up 23 points (or +0.7%) to a record high and the S&P 500 index finished up 179 points firmer (or 0.7%) to a fresh peak. It was a shortened trading session due to the upcoming Independence Day holiday.
Interest Rates: US 2-year treasury yields bounced off 1.73% to 1.76% and US 10-year yields fell from 1.97% to 1.94% - the lowest since 2016. Interest-rate markets priced 33bp of easing at this month’s Federal Reserve July meeting and there are a total of four cuts priced by the middle of 2020.
Australian 3-year government bond yields bounced off 0.89% to 0.91% and 10-year yields consolidated between 1.29% and 1.31%. Interest-rate markets are pricing only a 20% chance of an RBA rate cut in August.
Foreign Exchange: The US dollar index was modestly firmer in overnight trade. EUR/USD ranged sideways between 1.1269 and 1.1312 and USD/JPY rose slightly from 1.06.70 to 107.88. The outperformer was the AUD. The AUD/USD exchange rate rose from 0.6982 to a two-month high of 0.7039. The NZD also performed well with NZD/USD rising from 0.6680 to 0.6720.
Commodities: Iron ore surged further, up 1.0% to a fresh five-year high of US$127.15, underpinned by Chinese demand and supply constraints. Since December, the spot price has risen nearly 100%. Brent crude oil rose 2.4% to US$63.90 a barrel after the latest weekly EIA update reported a fall in inventories.
Australia: Building approvals rose for the first time in three months in May, lifting 0.7%. It was a small increase after the sizeable declines over the previous two months of 13.4% and 3.4%, respectively. On an annual basis, approvals were down 19.6% in May. Despite the lift in the month, approvals continue to be on a downward trend and are pointing to ongoing weakness in residential construction.
The trade surplus climbed to a record high of $5.7 billion in May, from $4.8 billion in April. Rising iron ore prices, a recovery in export volumes and a weaker Australian dollar boosted exports. Exports rose 3.6% in the month and imports increased by 1.5%.
The AiG performance of services index edged down from 52.5 in May to 52.2 in June, but still held above the 50 mark signalling expansion. It followed four consecutive months in contraction in the first four months of the year. There was an encouraging lift in the new orders sub-index, signalling better conditions ahead, but the employment sub-index weakened. Of the various sectors, retail trade remains in contraction territory.
China: The services sector slowed in China. The Caixin services purchasing managers’ index (PMI) fell from 52.7 in May to 52.0 in June, which is the weakest result in four months. It further points to weak momentum in the Chinese economy. Given manufacturing activity also weakened, the composite index fell from 51.5 in May to 50.6 in June, also the lowest in four months and suggests authorities will provide further stimulus.
Europe: The majority of Eurozone and periphery service PMI’s (published by Markit) beat consensus estimates and so provided a more stable profile for the final June service and composite PMI readings. However, Markit’s commentary and assessment remains decidedly negative. Markit project regional GDP growth was 0.2% in Q2 with downside risks.
The European Commission (EC) dropped the potential of disciplinary action against Italy with respect to fiscal responsibility over their 2019 budget.
United States: Private payrolls rebounded in the June ADP jobs report. Private firms added 102k positions in June, stronger than May's revised reading of 41k, but below consensus forecasts for 140k.
The services sector ISM index fell to a two-year low of 55.1 in June, from 56.9, though both the new orders and employment sub-indices remained comfortably in expansionary territory above 50.
The US trade balance widened by more than consensus expected, to a five-month high of US$55.5 billion, from US$51.2 billion. The US deficit with China jumped to US$30.1 billion from US$26.9 billion.
Finally, factory orders were revised down to show a steeper fall of 0.7% in May.
On trade-war developments, US President Trump accused China and Europe of playing a “big currency manipulation game”, reiterating complaints that US’s trading partners are using unfair tactics to compete. Trump further said that the US should match their efforts “or continue being the dummies who sit back and politely watch as other countries continue to play their games."
The Nikkei reported that HP, Dell, Microsoft and Amazon are considering shifting substantial production capacity out of China. It was reported that HP and Dell will relocate up to 30% of their notebook assembly out of the country and that Google, Sony and Nintendo are studying similar moves.
Today’s key data and events:
AU Retail Sales May exp 0.1% prev -0.1% (11.30am)
AU ABS Job Vacancies May Q prev 1.4% (11:30am)
EZ Retail Sales May exp 0.3% prev -0.4% (7pm)
US Independence Day (markets closed)
Besa Deda, Chief Economist