Bank of Melbourne

Morning Report

Main Themes: Investors reacted to the news that Iran seized a British oil tanker in the Strait of Hormuz. Investors also reacted to comments from St. Louis Federal President James Bullard and clarifying remarks from New York Federal Reserve officials. Financial markets lengthened the odds for a 50 basis point rate cut from the US central bank at the end of this month. Markets are betting that the size of the cut will be 25 basis points.
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Main Themes: Investors reacted to the news that Iran seized a British oil tanker in the Strait of Hormuz. Investors also reacted to comments from St. Louis Federal President James Bullard and clarifying remarks from New York Federal Reserve officials. Financial markets lengthened the odds for a 50 basis point rate cut from the US central bank at the end of this month. Markets are betting that the size of the cut will be 25 basis points.

Share Markets: Middle-east tensions caused risk appetites to wane on Friday and equities to close lower. The Dow Jones fell 69 points (or-0.3%) and the S&P 500 index closed 19 points down (or -0.6%).

An earnings deluge in the US is coming this week. Just under a third of S&P 500 companies are set to report. The reports will offer a glimpse into every major sector of the economy. Investors will turn a keen eye to how tech giants like Facebook, Amazon, Google and Twitter are standing up to the threat of new regulation.

Interest Rates: US 2-year treasury yields rose from 1.76% to 1.82% and US 10-year yields rose from 2.03% to 2.06%. Interest-rate markets are pricing 30 basis points of easing at the 30-31 July meeting of the Federal Reserve (from 40 basis points in the previous session). The longer odds are due to remarks from the Fed’s Bullard on Friday.

Australian 3-year government bond yields ranged between 0.91% and 0.93% and Australian 10-year yields traded between 1.35% and 1.37%. Interest-rate markets continued to price a 15% chance of an RBA rate cut in August.

Foreign Exchange: The US dollar index rose from a low of 96.67 to a high of 97.29. EUR/USD fell from 1.1270 to 1.1204, as the Italian coalition looks more vulnerable. USD/JPY rose from 107.50 to 107.97. Meanwhile, AUD/USD fell from near the 0.7080 handle to 0.7024, mainly due to the strength in the greenback and lower risk appetites.

Commodities: Oil lifted modestly in Friday’s trading session. News that Iran seized two oil tankers broke after the market closed. Oil futures pushed higher on that news. Gold closed lower, but during trade had struck a 6-year high of US$1453 a tonne.

Australia: There was no major economic data released locally on Friday.

Japan: Core consumer prices rose by 0.5% in the year to June, after a similar-sized rise in the previous month. The data reveals inflation remains weak but perhaps not depressed enough for the Bank of Japan to step up in the near term with additional stimulus.

Prime Minister Shinzo Abe won a majority in Japan's upper-house elections, but will not get the two thirds of seats needed to revise the country's pacifist constitution. Abe said the vote showed acceptance for his plans to raise the sales tax and to open debate on amending the charter. His LDP and coalition partner Komeito will hold a projected 139 of 245 seats in the chamber.

United States: The University of Michigan’s preliminary measure of consumer sentiment edged up to 98.4 this month, from 98.2 in June. Consensus surveyed by Bloomberg had forecast a reading of 98.4. The result remains near a 15-year peak, despite rising economic headwinds that are likely to spur the Federal Reserve to cut interest rates at the end of this month. Both the current and expectations indices in this survey also held firm.

St. Louis Federal Reserve President James Bullard said on Friday that an interest rate cut may be necessary at this point, but that does not mean the Federal Reserve is on a path to dramatically lower rates. Bullard, who argued unsuccessfully for such an immediate cut at the Fed's last meeting, also said it would be "very difficult" at this stage to not deliver.

Bullard also said that cutting rates does not mean the Fed is necessarily in an "easing cycle" or on a pre-set course to lower rates further. Fed officials, he said, will need to decide what to communicate about what economic data will matter to them when they take their next steps. Worse outcomes in US trade negotiations or a poor response by inflation to Fed easing were reasons Bullard cited that could create the conditions to ease policy further.

New York Federal Reserve officials clarified remarks made by its President John Williams last week. Williams had said that “it pays to act quickly” when stimulus is needed. Officials on Friday said these comments were academic in nature and not about possible action at the Federal Reserve’s upcoming July meeting.

 

Today’s key data and events:

US Chicago Fed Nat Activity Index Jun exp 0.10 prev -0.05 (10:30pm)

JN Bank of Japan’s Kuroda Speech at IMF (1am)

 

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