Bank of Melbourne

Morning Report

Main Themes: The European Central Bank (ECB) signalled strongly that fresh stimulus was on its way. But equities fell with the US S&P 500 index falling 0.5% and the Euro Stoxx index dropping 0.6%. Financial markets arguably had craved an even more dovish policy signal from the ECB.
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Main Themes: The European Central Bank (ECB) signalled strongly that fresh stimulus was on its way. But equities fell with the US S&P 500 index falling 0.5% and the Euro Stoxx index dropping 0.6%. Financial markets arguably had craved an even more dovish policy signal from the ECB.

Share Markets: US share markets fell fromrecord highs amid a torrent of corporate results. The Dow Jones closed down 189 points (or -0.5%) and the S&P 500 index fell 16 points (or -0.5%).

Interest Rates: US 10-year bond yields rose 3 basis points to 2.08%, after a strong print for US durable goods orders and a position squeeze after the ECB announcement. German bund yields briefly touched fresh all-time lows after the ECB policy announcement (-0.422%), but finished the session 1.5 basis points higher to 0.363%.

Foreign Exchange: EUR/USD fell to a two-year low of 1.1101 in the immediate wake of the European Central Bank (ECB) policy announcement. EUR/USD later recovered to as high as 1.1185 during ECB President Draghi’s press conference, even as he said a “significant degree” of monetary stimulus is needed and that the outlook is “getting worse and worse.”

The Australian dollar continued to slip through offshore hours, building on an earlier decline following the RBA Governor Lowe’s speech yesterday. AUD fell to a 2-week low of 0.6943 overnight.

Commodities: Oil firmed overnight, supported by elevated Iran tensions.

Australia: Reserve Bank Governor Lowe spoke at an Australian Business Economists’ (ABE) function supporting the Anika Foundation yesterday. The key message from the speech was to defend the RBA’s 2 to 3 percent inflation target. Lowe argued that by keeping the inflation target unchanged, it would maintain credibility for the target and keep inflation expectations anchored. In regards to the outlook for monetary policy, Lowe continued to show an openness to lower interest rates further, and added an element of uncertainty about the economic outlook. Lowe stated “it remains to be seen if future growth in demand will be sufficient to put pressure on the economy’s supply capacity and lift inflation in a reasonable timeframe”. While this was a “possible” scenario, “if demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further”. On top of these comments, Lowe provided some longer-term forward guidance - “it is reasonable to expect an extended period of low interest rates”. 

Europe: The ECB kept rates steady and altered its policy statement to lay the groundwork for a rate cut in the near future, probably September. The central bank said interest rates will remain at their present or lower levels at least through the first half of next year. It will review options for rate tiering and potential new net asset purchases. ECB President Mario Draghi said significant monetary stimulus is needed.

Germany’s IFO survey for July reflected the downside misses seen in both ZEW and the flash purchasing managers’ indices. The headline IFO business climate figure fell to 95.7 in July, from 97.5. It was lower than consensus expectations centred on a result of 97.2. The expectations index fell from 94.0 to 92.2 – its lowest level since 2009.

United States: Durable goods orders and shipments topped consensus estimates after several disappointing months. Headline durable goods orders rose by 2.0% (consensus estimate: 0.7%). The detail in the report was also encouraging. Non-defence capital goods shipments ex-aircraft rose by 1.9% and shipments advanced 0.6%. The durable goods data are notoriously volatile but this month’s update is reassuring given the downturn in global manufacturing and ongoing trade risks.

The advance goods trade deficit narrowed to $74.2 billion in June, from $75 billion in May.

Wholesale and retail inventories rose by less than expected in June, prompting downward revisions to Q2 GDP expectations (due Friday), despite the strong durable goods orders.

The popular Atlanta Fed GDP Nowcast for Q2 fell to an annualised rate of 1.3% in Q2, from 1.6% in Q1.

Initial jobless claims held in the low 200ks for yet another week (216k), signalling ongoing robust labour market conditions.

 

Today’s key data and events:

US GDP Q2 annualized exp 1.8% prev 3.1% (10.30pm)

CH Industrial Profits Jun y/y prev 1.1% (11.30am, Sat 27 Jul)

 

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