Bank of Melbourne

Morning Report

Main Themes: Already fragile market sentiment was dented by Trump’s comments on Friday that he was not ready to make a deal with China. US shares weakened, although bond yields edged higher.

Main Themes: Already fragile market sentiment was dented by Trump’s comments on Friday that he was not ready to make a deal with China.  US shares  weakened, although bond yields edged higher.

Share Markets: In a volatile session, US stocks ended weaker. The Dow closed 0.3% lower, while the S&P500 fell 0.7%.

Interest Rates: Yields on US treasuries lifted in spite of weaker-than-expected producer price inflation, and ongoing risk aversion in equity markets.  Nonetheless, yields remain near their recent lows. US 10-year yields lifted 3 basis points to 1.74%.

Foreign Exchange: The US dollar index trended sideways, but lost ground early this morning. Sterling hit near 3-year lows against the US dollar following the contraction in GDP. Yen outperformed amid the risk aversion, while the Australian dollar continued to buffeted by the trade woes edging down from 68.2 US cents to 67.8 US cents this morning.

Commodities: Oil prices rose despite the weaker risk aversion and the IEA said that global oil demand weakened.  Expectations of constrained supply from OPEC is keeping a floor under prices. Gold prices  were mostly steady but remained near a four-year high.

Australia: There was an influx of RBA commentary on Friday - the RBA Governor Lowe first gave his semi-annual testimony to Parliament which was followed by the release of the RBA’s Statement on Monetary Policy. As flagged on Tuesday, the RBA downgraded its near-term growth and inflation forecasts. GDP is expected to grow at 2.5% for this year down from 2.75% previously. The GDP forecast for 2020 remained unchanged at 2.75% at a pace close to trend, and is expected to pick up to 3.0% in 2021. The RBA was cautiously confident that the domestic outlook would improve. Lowe said that “there were signs that the economy may have reached a gentle turning point”. The Governor pointed to “low interest rates, the recent tax cuts, a depreciation of the Australian dollar, a brighter outlook for investment in the resources sector, some stabilisation of the housing market and high levels of infrastructure” as factors which will see growth return to trend next year.

A major takeaway was the discussion of unconventional policies by the Governor in the Q&A session in Parliament. While Lowe downplayed the likelihood that the RBA would need to use unconventional policies, Lowe said that it was “possible that we end up at the zero lower bound”. These comments would suggest that the RBA could lower rates as far as zero if it needs to. Moreover, if unconventional policies were required, it could be accompanied by a package of policies that will depend on the circumstances at the time.

The RBA’s forecasts for economic growth this year and next continue to be optimistic in our view. While there are factors which will support the outlook over the second half of 2019, we have doubts that economic growth will strengthen sufficiently to meet the RBA’s growth forecasts. The global environment adds another layer of uncertainty. Indeed, the recent escalation of trade tensions provides a significant downside risk. We continue to expect the RBA will lower official interest rates in October and once again to 0.5% early next year.

China: Consumer price inflation picked up from an annual rate of 2.7% in June to 2.8% in July. Consumer prices have been boosted by food prices, in particular prices of fruit and and pork. However, producer prices declined 0.3% over July, signalling that China has now entered a period of producer price deflation for the first time since 2016. It also indicates weakness in China’s industrial sector. While iron ore prices have lifted, energy prices and costs of other materials have been weak. 

The IMF said it was maintaining its assessment that the Chinese yuan was mostly in line with economic fundamentals. The IMF also added that China and the global economy would benefit from structural reforms, opening up China, and increased exchange rate flexibility. The IMF said that escalating trade tensions would warrant further fiscal stimulus measures, and that if the US would impose a 25% tariff on the remaining $300 billion Chinese imports it would reduce China’s growth by around 0.8 percentage points over the next 12 months.

Japan: GDP grew 0.4% in the June quarter, above expectations for a 0.1% lift. Moreover, growth in the March quarter was revised upwards from 0.6% to 0.7%. Economic growth was broadbased and underpinned by private consumption, business investment, housing investment and public spending. It suggests positive momentum heading into a sales tax hike in October and growing downside risks from the global economy.  

United Kingdom: The UK economy contracted 0.2% in the June quarter, after growth of 0.5% in the March quarter, reflecting the impact of Brexit uncertainty ahead of the original expected deadline of March 29. An unwinding of stockbuilding in the March quarter contributed to the weak result in the June quarter, was a one-off factor. However, there is still uncertainty weighing on confidence and economic activity and there is continuing to be weak momentum in the economy.

United States: Producer price inflation in July was stronger than expected, lifting 0.2%, leaving the annual rate was left unchanged at 1.7%. However, core producer prices, which exclude food and energy unexpectedly fell in the month, down 0.1%, the first decline in two years. The annual rate eased from 2.3% to 2.1%, suggesting that price pressures remain muted. 


Today’s key data and events:

NZ Card Spending Jul prev 0.1% (8.45am)


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