Bank of Melbourne

Morning Report

Main Themes: The US dollar and US bond yields fell after US New York Federal Reserve President John Williams suggested significant easing is necessary. US share markets finished higher, as investors also digested mixed company earnings reports.



Main Themes: The US dollar and US bond yields fell after US New York Federal Reserve President John Williams suggested significant easing is necessary. US share markets finished higher, as investors also digested mixed company earnings reports.

Share Markets: US share markets rebounded after New York Federal Reserve President Williams highlighted the need for swift rate action. The S&P 500 index erased losses to close slightly higher, led by consumer and financial stocks. At the close, the S&P 500 was up 11 points (or 0.4%) and the Dow Jones was up 3 points (flat in daily percentage change terms).

Interest Rates: US 2-year treasury yields fell from 1.84% to 1.76% and US 10-year yields fell from 2.08% to 2.03%.

Interest-rate markets are pricing 38 basis points of easing at the July 30-31 Fed meeting, up from 33bp yesterday, spurred by overnight remarks from US New York Federal Reserve President Williams.

Australian 3-year government bond yields initially rose to 0.93% before following US yields lower to 0.89%. Australian 10-year bond yields ranged between 1.34% and 1.38%. Interest-rate markets priced a 15% chance of an RBA rate cut in August (from 20% yesterday).

Foreign Exchange: The US dollar extended its losses against the euro, yen and other major currencies overnight as remarks from New York Federal Reserve President John Williams increased bets the US central bank would lower interest rates at month’s end. EUR/USD rose from 1.1210 to 1.1270. Outperformer GBP rose from 1.2400 to 1.2544 against the USD after the Brexit-related vote. USD/JPY fell from 108.00 to a one-month low of 107.40. AUD/USD rose from 0.7030 to a three-month high of 0.7076. NZD/USD rose from 0.6740 to a three-month high of 0.6871. And the AUD/NZD pair appreciated slightly from a four-month low of 1.0393 to 1.0445.

US Treasury Secretary Steven Mnuchin said there's no change in the US's dollar policy "as of now," but wouldn't rule out a shift in the future. Mnuchin’s comments come as the Trump administration softens the long-held US stance of supporting a strong US dollar, instead favouring a stable exchange rate as it battles China in a trade war and threatens tariffs on other countries.

Commodities: Crude oil prices fell to their lowest in a month, as the resumption of Russian pipeline flows fed worries about a supply glut. These worries overshadowed news of Iran's seizure of a foreign ship that was smuggling fuel in the Persian Gulf. The seizure threatens to heighten already elevated tensions in the region.

Meanwhile, the gold price rose to its highest since 2013 on Fed easing expectations

Australia: Employment grew 0.5k in June, the weakest monthly increase in 11 months. However, it followed very strong job gains in previous months. As a trend, employment growth remains solid. The three-month average increase was 29.2k in June, although this was down from 35.8k in May.

Weak employment growth in June could be the beginning of a period of softer job gains. While we are always wary of reading too much into one month’s data, a number of other indicators such as job ads, business conditions and job vacancies have been pointing to a slower pace of job growth. For some time, job growth has surprised with its strength, particularly given that the domestic economy is growing at its softest pace in 10 years.

The unemployment rate was steady at 5.2% in June. But the prospect of softer job growth continues to highlight a risk that the unemployment rate will rise in coming months. The underemployment rate fell sharply, from 8.6% in May to 8.2% in June, but it is back where it was in March, suggesting yesterday’s data is not likely to be the start of a trend decline.

Reserve Bank Governor Lowe said recently that the unemployment rate could be and should be lower, and indicated that the unemployment rate could get to 4.5% before inflation becomes a concern. This would suggest that another rate cut remains on the cards.

Business confidence improved from a reading of -1 in the March quarter to +6 in the June quarter. The bounce likely reflects reduced uncertainty after the Federal election. However, business conditions weakened from +4 to +1, indicating actual activity remains weak. In the monthly survey, confidence fell back to levels prior to the Federal election, suggesting that this bounce in confidence will be temporary. The survey cited demand as the most influential issue affecting business confidence. This was followed by Federal Government policies and regulations, pressure on margins, wage costs and availability of suitable labour.

United Kingdom: Parliament voted to block moves towards a no-deal Brexit. The House of Commons voted 315-274 for the block due to a series of Conservatives abstaining or defying the Party.

European Union’s Barnier and Irish PM Varadkar both indicated a degree of willingness to negotiate once the new UK PM is confirmed, suggesting that they were open to alternatives around the Irish border and even a further extension to the current October 31 deadline.

Retail sales excluding fuel jumped 0.9% in June, after contracting by 0.4% in May. Annual retailing growth also shot up, from 2.0% in May to 3.6% in June. There is a risk that UK’s economy shrunk in the June quarter, a hangover from the stockpiling boom that took place ahead of the original Brexit deadline in March. But the unexpected strength of retail sales in June could help to reduce that risk. Still, retail sales over the three months to the end of June grew by just 0.7%, the weakest reading since the three months to February.

United States: New York Federal Reserve President John Williams said overnight that one of the lessons from his research is that, when rates and inflation are low, policymakers cannot afford to keep their "powder dry" and wait for potential economic problems to materialise. Williams also said that “it's better to take preventative measures than to wait for disaster to unfold” and that “when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress." These remarks by Williams will likely be read as a strong argument in favour of quick action by the Fed to cut rates later this month.

Initial jobless claims remained very strong, indicating continued robust domestic employment: Last week initial jobless claims printed at 216k, which is in the middle of the 200-225k range we’ve seen over the past few years. This result is higher than the downwardly revised 208k from the previous week, but lower than the 220k expected by market consensus.

The Philly Fed survey, as we saw with Empire State numbers, rebounded to +21.8 in July, from an initially reported +0.3 last month and a +3.9 read expected by markets. The last time we saw this big a jump in Philly Fed was exactly one year ago. These indexes do tend to carry some volatility month to month, but it would appear regional production is holding up.

The leading index fell by 0.3% in June, after a flat outcome in May.


Today’s key data and events:

JN Consumer Prices Jun y/y exp 0.7% prev 0.7% (9.30am)

US UoM Cons. Sentiment Jul Prel. exp 98.8 prev 98.2 (12am)

US Federal Reserve’s Bullard Speaks (1:10am)


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