Bank of Melbourne

Morning Report

Main Themes: Yesterday, the Chinese allowed their currency to depreciate sharply, sparking fears that trade tensions between the US and China were taking a worrying turn. Shares and bond yields plunged overnight. The Australian dollar also fell in response.
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Main Themes: Yesterday, the Chinese allowed their currency to depreciate sharply, sparking fears that trade tensions between the US and China were taking a worrying turn. Shares and bond yields plunged overnight. The Australian dollar also fell in response. 

Share Markets:  US stocks plunged, reflecting fears of escalating trade tensions. The Dow fell 2.9%, while the S&P500 slumped 3.0%.

Interest rates: Yields on US treasuries similarly fell sharply on the deterioration in risk appetite and concerns over global growth. US 10-year yields slumped 14 basis points to 1.71%, their lowest since 2016.   

Foreign Exchange: The US dollar index weakened, despite the increased risk aversion and is tending to lose ground against the euro on the escalation in trade tensions over the past few days. JPY outperformed. CNY jumped to above 7 (depreciated against the USD) yesterday, suggesting a major shift in the recent strategy of keeping the yuan “stable”. The 7 level was also viewed as a floor for the yuan by authorities and by markets. The market will be watching today’s daily fixing for the yuan today, after allowing a substantial depreciation yesterday. After breaking a key psychological level, there could be further pressure to depreciate, although restrictions on capital flows may limit RMB weakness. The Australian dollar consequently lost ground with the escalation in risk aversion and pessimism over trade developments. AUD dropped sharply below 68 US cents upon the open of RMB trading yesterday, and then held within a range of 67.48 to 67.85 US cents.

Commodities: Oil prices fell sharply as the rising trade tensions bolstered concerns over the global demand. Meanwhile, gold prices jumped as investors sought safe havens.   

Australia: The AiG’s performance of services Index  plunged from 52.2 in June to 43.9 in July, falling back into contraction territory after two consecutive months above 50. It was the weakest since 2014, providing a worrying sign for services activity.

Melbourne Institute inflation rose 0.3% in July, while the annual rate lifted from 1.6% to 1.8%. Trimmed mean inflation lifted 0.3% for a 1.9% increase. There were more items with a reported increase in prices, which could suggest further pass through of the weaker Australian dollar on prices.

China: The People’s Bank of China (PBoC) let the yuan depreciate in its daily rate fixing yesterday, to be above the key USD/CNY 7 mark. Key reasons for the RMB depreciation cited by the PBoC was “trade protectionism and additional US tariffs on Chinese goods”, indicating a new strategy for the Chinse government in supporting growth. PBoC Governor has said in a statement that China wouldn’t use the yuan as a tool to deal with trade disputes, and said he was “fully confident that the yuan will remain a strong currency in spite of recent fluctuations amid external uncertainties”. Despite pressures to depreciate, the yuan has likely been kept stable in the near-term given the risk of derailing negotiations in trade talks. Thus, the move to depreciate the currency suggests a new hard line stance in China’s approach to Trump’s trade negotiation tactics. Indeed, Trump has responded by accusing China of “currency manipulation”.   It has also been reported that the government has requested state-owned companies to suspend imports of US agricultural products.

In the run of data, the Caixin services PMI weakened from 52.0 in June to 51.6 in July. It remains above the 50 mark which signals expansion, but it was the weakest in five months.  

Europe: Europe’s services PMI for July was revised down slightly from 53.3 to 53.2 in the final estimate, still down from the 53.6 reading for June, but continuing to remain above 50, despite the weakness in manufacturing.  

United Kingdom: The services PMI lifted from 50.2 in June to 51.4 in July, suggesting some stabilising in activity in the month. The lift could alleviate some recession fears.

United States: The ISM non-manufacturing index dropped from 55.1 in June to 53.7 in July, the weakest since 2016. The loss in momentum in services activity is mirroring the manufacturing gauge, pointing to a broadbased loss of momentum in economic activity.

The Markit measure, conversely rose from 51.5 in June to 53.0 in July, although remains weaker as a trend.

 

Today’s key data and events:

NZ Unemployment Rate Q2 exp 4.3%  prev 4.2% (8.45am)

NZ Employment Q2 exp 0.3% prev -0.2% (8.45am)

NZ Private Wages Ex. Overtime Q2 exp 0.7% prev 0.3% (8.45am)

AU ANZ Job Ads Jul prev 4.6% (11.30am)

AU Trade Balance Jun exp $6.2bn prev $5.7bn (11.30am)

AU RBA Board Decision exp 1.00% prev 1.00% (2.30pm)

EZ German Factory Orders Jun  exp 0.5% prev -2.2% (4pm)

US Fed's Bullard Speaks on U.S. Economy in Washington (2.00am)

 

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.

Janu Chan, Senior Economist Ph: 02-8253-0898