Bank of Melbourne

Morning Report

Main Themes: Weak economic data from Europe and China reinforced fears about the global outlook. US shares and bond yields fell sharply. The Australian dollar is weaker.


Main Themes: Weak economic data from Europe and China reinforced fears about the global outlook. US shares and bond yields fell sharply. The Australian dollar is weaker.

Share Markets: US stocks sold off sharply reflecting global growth concerns and the lingering trade uncertainties. The Dow lost 800 points or 3.1%, the largest one-day drop this year. The S&P500 fell 3%.

Interest Rates: Yields on US treasuries fell sharply, on the heightened concerns about the world economy. US 10-year yields fell below 2 year yields at one point, providing a warning sign for the growth outlook. US 10-year yields fell 12 basis points to 1.58%.

Foreign Exchange: The US dollar and the Japanese yen were the big gainers in the risk averse environment and following the weak data from China and Europe. The Australian dollar sold off given the global growth concerns, falling to 67.5 US cents.

Commodities: Oil prices fell sharply on weak global economic data, and were also weighed down by an unexpected build of crude stocks. Gold prices rose as safe-haven demand rose.

Australia: Consumer sentiment rebounded in August, following two consecutive months of decline. The index stood at 100, the point where optimists equal pessimists. Confidence has recovered somewhat after the two rate cuts over June and July.  The turnaround appears to have been driven by the indices  economic conditions

Wages grew at a slightly stronger-than-expected rate of 0.6% in the quarter. However, the annual growth remained muted at 2.3%, and in line with forecasts.  In his testimony to parliament last Friday, RBA Governor Lowe said that he would like wage growth to have a ‘3’ in front. Yesterday’s data provides evidence that the pace of wage growth remains far from what the RBA would prefer. Wage growth in the June quarter was boosted by Victorian public sector wages in the healthcare sector. The boost drove public sector wages up 0.8% in the quarter, the strongest quarterly increase in five years.  However, the underlying story of weak wage growth remains unchanged.The growing signals that employment growth will slow point to the spare capacity in the labour market persisting for some time. It also suggests limited prospects for wage growth to pick up in a meaningful way. Indeed, we have been highlighting for some time that the risk is that the unemployment rate rises which further lessens the likelihood for stronger growth in wages. With this outlook for ongoing weak wage growth, inflation is likely to remain below the RBA’s 2 to 3 per cent target band for some time.

China: Indicators over July point to a further slowdown in economic activity. Industrial production eased from an annual rate of 6.3% in June to 4.8% in July, the weakest pace since 2002. Household spending also softened – retail sales eased from an annual rate of 9.8% in June to 7.6% in July. Annual growth in fixed asset investment edged down only mildly, from 5.8% in June to 5.7% in July, reflecting the push by authorities to boost growth through infrastructure spending. Nonetheless,  the softening global economy and the trade tensions are taking a heavier toll on industrial activity in China. Policymakers are expected to ramp up stimulus as a result.

Europe: German GDP contracted 0.1% in the June quarter in line with the median estimate. Industrial and construction activity were the major drags on economic growth, although services activity remained in expansion. Indicators in the September quarter are suggesting further weakness, highlighting a risk that Europe’s largest economy is close or will enter recession. The broader euro zone economy grew 0.2% in the June quarter, unrevised from the first estimate.

A 1.6% contraction in industrial production for the euro zone further adds to signs of weakening factory activity.

Japan: Core machine orders surged 13.9% in June, more than offsetting a 7.8% decline in May and against consensus expectations for a 1% drop. While machine orders are volatile month-to-month, it continues to point to some resilience in business investment. The gain was driven by the services sector. Nonetheless, the loss of momentum in the global economy continues to suggest that the outlook is weakening. 

United Kingdom: Both headline and core inflation were a touch higher than median forecasts. Headline CPI was unchanged in the month, while annual headline inflation picked up from 2.0% in June to 2.1% in July. Core inflation also edged higher, from 1.8% to 1.9%.  The pick up may prevent the Bank of England (BoE) from joining other central banks in easing policy, now inflation is a touch above the BoE’s target. A further weakening in sterling suggests another upside risk to inflation. 

United States: Import prices edged 0.2% higher in July, following a sharp 1.1% drop in June. The downward impact on prices from a stronger US dollar has kept down prices in spite of the range of tariffs imposed on imports.

Trump took to twitter to criticize the Federal Reserve once again, stating “Our problem is with the Fed. Raised too much & too fast. Now too slow to cut…”


Today’s key data and events:

AU RBA's Debelle Gives Speech in Sydney (9am)

AU Consumer Inflation Expectations Aug prev 3.2% (11am)

CH New Home Prices Jul prev 0.7% (11:30am)

AU Labour Force Jul (11.30am)

– Employment Change exp 5k prev 0.5k

– Unemploy Rate Jul exp 5.3% prev 5.2%

– Participation Rate Jul  exp 65.9% prev 66%

JN Industrial Production Jun final prev -3.6%  (2.30pm)

UK Retail Sales Jul exp -0.2% prev 1.0% (6.30pm)

US NY Empire Mfg Aug exp 2.0 prev 4.3 (10.30pm)

US Phily Fed Index Aug exp 9.3 prev 21.8 (10.30pm)

US Retail Sales Jul exp 0.3% prev 0.4% (10.30pm)

US Industrial Production Jul exp 0.1% prev 0.0% (11.15pm)

US NAHB Housing Index Aug exp 65 prev 65 (12.00am)

US Total Net TIC flows Jun prev $32.9bn (6.00am)


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