Bank of Melbourne

Morning Report (table updated)

Main Themes: The US S&P 500 share market index struck a fresh record high and the USD index rose to its highest level in two months, propelled by stronger-than-expected US economic growth in Q2.
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Main Themes: The US S&P 500 share market index struck a fresh record high and the USD index rose to its highest level in two months, propelled by stronger-than-expected US economic growth in Q2.

Share Markets: The S&P 500 index finished at a new record higher, after closing up 22 points (or +0.7%). The Dow Jones finished 51 points higher (or +0.2%).

Interest Rates: US 2-year treasury yields initially rose from 1.85% to 1.88% following the GDP data but didn’t sustain the move, closing back at 1.85%. US 10-year yields similarly ranged between 2.06% and 2.10%. Interest-rate markets are pricing 28 basis points of easing at the July 30-31 meeting later this week.

Australian 3-year government bond yields fell from 0.83% to 0.80% and Australian 10-year yields fell from 1.25% to 1.22%. Interest-rate markets continued to price a 15% chance of an RBA rate cut in August.

Foreign Exchange: The US dollar index was firmer in Friday night’s trading session, stretching to a two-month high. Stronger-than-expected US GDP data underpinned demand for the greenback. The firmer demand for the USD saw AUD/USD fall from a high of 0.6950 to a one-month low of 0.6903.

Commodities: The price of gold moved higher, despite the appetite for more risk by investors on Friday. Oil was also firmer, as was the price of iron ore.

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

China: Industrial profits fell by 3.1% in June, after a rise of 1.1% in May.

United States: GDP expanded at a 2.1% annualised pace in Q2, topping consensus estimates for growth of 1.8%. Consumer and government spending propelled the economy in Q2. Household consumption grew 4.3% in the quarter, which is the best outcome since late 2017. Government spending grew 5%, its fastest pace since mid 2009. Growth in these areas offset declines in business investment, residential investment, net trade and inventories.

Q1 GDP was unrevised at 3.1%, but revisions to 2018 lowered the annual pace at year’s end to 2.5% from 3.0%. The Federal Reserve will be comforted by the strength of the consumer, though Q2’s pace is unsustainable. The weakness in business investment and trade will also be a concern.

US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer head to Shanghai today for the first high-level, face-to-face negotiations since May.

 

Today’s key data and events:

JN Retail Sales Jun exp -0.3% prev 0.3% (9:50am)

US Dallas Fed Mfg Activity Jun exp -5.0 prev -12.1 (12:30am)

 

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