Bank of Melbourne

Morning Report

Main Themes: Markets appeared to settle down overnight after the recent escalation in trade tensions. The yuan was allowed to stabilised yesterday, providing some reassurance that the trade war was not escalating further. US shares partially reversed yesterday’s losses, regaining over 1%. However, bond yields and the Australian dollar remain near their lows.
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Main Themes: Markets appeared to settle down overnight after the recent escalation in trade tensions. The yuan was allowed to stabilised yesterday, providing some reassurance that the trade war was not escalating further. US shares partially reversed yesterday’s losses, regaining over 1%. However, bond yields and the Australian dollar remain near their lows.

Share Markets: US markets rebounded partially from the previous session’s losses. Major US indices all gained over 1% - the S&P500 lifted 1.3%.

Interest rates: Yields on US treasuries held onto the sharp falls of the last few days. US 10-year yields were down 1 basis point for the session at 1.70% and down 38 basis points within two weeks. At current levels, they are at their lowest since 2016. Australian 10-year bonds fell to below 1% yesterday, hitting a low of 0.97% before clawing up to 1.05% at the close yesterday.

Foreign Exchange: The US dollar index edged higher, partially retracing recent losses in the latest trade spats over the past few days. the Japanese yen also reversed, edging slightly lower. Yesterday, the yuan stabilised to a range of between 7.060 and 7.012, although at a level weaker prior to the previous day’s trade. The move allayed some fears that the yuan was not devalued further. The Australian dollar edged higher in Asian trade yesterday, but then pared those gains in the overnight session to be little changed at around 67.6 US cents.

Commodities: Oil prices continued to weaken, reflecting fears about global demand amid trade tensions. Gold prices continued to strengthen, and has been the big winner in the escalating trade dispute.

Global: US President Trump has dismissed concerns of a protracted trade war, while Beijing warned that the label of a currency manipulator would lead to chaos in financial markets.

Australia: The Reserve Bank (RBA) left the official cash rate unchanged at 1.0% at its August meeting after back-to-back cuts over June and July. The decision was widely expected by markets. The RBA has reiterated that it would “continue to monitor developments in the labour market closely and ease monetary policy further if needed.” The RBA remains on standby, continuing to leave the door open for more easing. There was only a small acknowledgement of the rapid deterioration in trade tensions between the US and China over the past few days. The RBA notes that there was “increased uncertainty” in regard to trade and technology disputes and it adds that “risks to the global economy remain tilted to the downside”. The RBA may be on the pause button for easing monetary policy, but we do not think it will be there for long. The support to economic growth is unlikely to be enough to drive a turnaround in the labour market sufficient to bring the unemployment rate down. The events over the past couple of days on trade further suggest increased downside risks to the global outlook. The RBA is continuing to indicate that it would lower official interest rates again “if needed”. A softening in employment conditions and the deteriorating global growth outlook suggests the RBA could see this need within the next few months. We continue to favour October as the timing for the next rate cut, but could not rule out September, particularly if employment disappoints and the global environment continues to deteriorate.

The trade surplus surged in June to $8.0bn, the largest on record, and a massive $1.9bn improvement on the $6.2bn recorded in June. Soaring iron ore prices are boosting export values. But also the weakness in domestic demand is weighing on growth in imports. In the month, exports rose 1.4%, and imports fell 3.6%. The sizeable surpluses over the past three months have amounted to $19.7bn, and suggests the June quarter may have posted a current account surplus, the first since the June quarter 1975.

ANZ job ads grew 0.8% in July, the second consecutive monthly increase. However, as a trend job ads are continuing to point to a moderation in employment growth. The annual rate remained in contraction, at -9.1% in July.

New Zealand: Labour market data was much stronger than expected. The unemployment rate fell unexpectedly from 4.2% to 3.9% in the June quarter, to its lowest in 11 years. Employment growth rose 0.8% after a revised 0.1% fall in the previous quarter. Moreover, wage growth picked up from 0.3% in the March quarter to 0.8% in the June quarter, partly reflecting an increase in the minimum wage. The RBNZ is still expected to lower official interest rates again. The RBNZ has provided a clear signal that a lower OCR was likely required. Moreover, international developments are still skewed towards the downside.

United States: In a speech yesterday, St.Louis Federal Reserve President Bullard said, “I don’t think it is realistic for the Fed to respond to each threat and counter threat in a tit-for-tat trade war”, suggesting that Fed would not be substantially altering its course of rate policy despite the escalation in trade tensions over the past few days. Bullard added that “US monetary policy is considerably more accommodative than it was as of late last year”. Bullard had been calling the Fed to lower interest rates earlier than the July meeting when the Fed actually cut rates last week. Bullard was paying close attention to upcoming data and continued to be focusing on the bond yield curve which was suggesting weakness in the economy.

 

Today’s key data and events:

AU AiG Perf of Construction Jul prev 43 (8.30am)

AU Housing Finance Jun (11.30am)

     – No. Owner Occupier ex refi exp 1.0% prev -0.1%

     – Value Investor ex refi exp 0.5% prev -1.7%

     – Value Owner Occupier ex refi exp 1.0% prev -2.7%

EZ Industrial Production Jun prev 0.3% (4.00pm)

NZ RBNZ OCR Decision exp 1.25% prev 1.50% (12.00pm)

US Fed's Evans Holds Media Breakfast in Chicago (2.00pm)

US Consumer Credit Jun exp $16.1bn prev $17.1bn (5.00am)

 

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