Main Themes: Remarks from the US administration overnight helped to dial down the risk-averse tone prevailing in markets in recent days. However, financial markets remain alert.
Share Markets: US shares were mixed overnight. A cautious mood prevailed, although President Donald Trump downplayed worries of a lengthy trade war and senior adviser Larry Kudlow said Trump’s administration is planning to host a Chinese delegation for talks in September. US sharemarket bourses began in the red, but edged higher throughout the session. The Dow Jones ended 22 points lower (or -0.1%) and the S&P 500 index finished 2 points higher (or +0.1%).
The US administration’s remarks marked a shift in tone from recent days, when Beijing warned that Washington’s labeling China as a currency manipulator would have severe consequences for the global financial order. The US move rattled financial markets and dimmed hopes the trade war was ending. Since then, China’s state banks have been active in the onshore yuan forwards market, tightening dollar supply and supporting the Chinese currency.
Interest Rates: US 2-year treasury yields rebounded in New York from a fresh two-year low of 1.50% to 1.60%. The US 10-year bond yield recovered from a three-year low of 1.59% to 1.72%. Markets are pricing 34 basis points of easing at the September 19 Fed meeting and a terminal rate of 1.01%. The midpoint of the federal funds rate currently is at 2.13%.
Australian 3-year government bond yields rebounded from a record low of 0.59% to 0.66% and the 10-year yield from an all-time low of 0.88% to 0.97%. Interest-rate markets are pricing 16 basis points of easing at the RBA’s September 3 meeting and a terminal rate of 0.35% (RBA cash rate currently sits at 1.00%).
Foreign Exchange: The US dollar index was down modestly in the overnigh trading sessions. EUR/USD rose from 1.1180 to 1.1240. USD/JPY roundtripped from 106.20 to 105.50 and back. The safe-haven yen and the Swiss franc were the best performing currencies over the past day. AUD/USD retraced most of yesterday’s RBNZ-led plunge, rising from 0.6677 (the lowest level since March 2009) to 0.6770. The underperformer over the past 24 hours has been the NZD after the RBNZ unexpectedly cut rates deeper than markets expected. NZD/USD rose from 0.6378 (lowest since January 2016) to 0.6467, still well below the 0.6550 level trading just prior to the RBNZ’s cut yesterday. AUD/NZD preserved yesterday’s gains, ranging sideways between 1.0450 and 1.0490.
Commodities: Commodity markets remained in a cautious mood. Iron ore continued to slide, down 4.5% to US$92.50 for a total loss of 27% over the past month. Meanwhile, gold, a safe-haven asset, rose 1.6% to US$1511 an ounce – the highest price since 2013.
Australia: The number of owner-occupier loans (excluding refinancing) rose for the first time in four months in June, lifting 0.4%. The value of investor loans also rose, lifting 0.6% in June, and was the first monthly increase in almost a year. The stabilising in lending corresponds with other signs of improvement in the housing market, in particular house prices and auction clearance rates. However, loans remain at a low level and annual rates were still weak. On a year ago, the number of owner occupier loans were down 13.6%, while the value of investor loans were down 24.6% in the year to June.
The AiG performance of construction index fell from 43.0 in June to 39.1 in July, the lowest level in six years. Weakness was driven by new orders and employment and suggest further soft conditions. Survey respondents indicated cost pressures, including elevated prices for energy, commodities and imported construction materials. There were also difficulties in filling skilled vacancies and accessing funding.
New Zealand: The Reserve Bank of New Zealand (RBNZ) cut the official cash rate (OCR) by 50 basis points to 1.0%, against consensus expectations for a 25 basis point cut. While the labour market had “held up relative to expectations”, the outlook for inflation and GDP growth along with global conditions were weaker. There was a debate among members to reducing the OCR by 25 basis points and adopting an easing bias, against reducing the OCR by 50 basis points at this meeting. The Committee, however, agreed on the larger monetary stimulus “would best ensure the Committee meets its inflation and employment objectives.” These comments suggest that the 50 basis point cut was not meant as a signal of an ‘emergency’ situation, but a pre-emptive move by the RBNZ.
Euro Area: German industrial production plunged 1.5% in June to be down 5.2% on levels a year ago, a much steeper fall than consensus expected. Weakness was reported across all major sectors. The prior month was revised lower too.
United States: Chicago Federal Reserve President Evans overnight said developments since the Fed’s last meeting present fresh headwinds to the economy and will warrant more easing. Financial markets view Evans as being a dove.
Today’s key data and events:
AU RBA's Bullock Gives Speech in Toowoomba (7.30am)
JN Current Acct Jun exp ¥1148.8bn prev ¥1594.8bn (9.50am)
CH Trade Balance Jul exp US$42.65bn prev US$5098.bn
CH Exports Jul y/y exp -1.0% prev -1.3%
CH Imports Jul y/y exp -9.0% prev -7.3%
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