Bank of Melbourne

Morning Report

Main Themes: Share markets and global bond yields rose overnight, as financial markets were encouraged by speculation Germany’s central bank might be about to embark on fiscal stimulus and US authorities were considering cutting the payroll tax. Washington also extended the reprieve on US customers doing business with Huawei.
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Main Themes: Share markets and global bond yields rose overnight, as financial markets were encouraged by speculation Germany’s central bank might be about to embark on fiscal stimulus and US authorities were considering cutting the payroll tax. Washington also extended the reprieve on US customers doing business with Huawei.

Share Markets: US share markets climbed overnight fuelled by speculation Germany’s central is poised to shore up its economy and the US government might cut payroll taxes. Stocks also received a boost after Washington extended by 90 days the window during which China's Huawei Technologies can buy components from US companies to supply existing customers. The Dow Jones closed 250 points higher (or +1.0%) and the S&P 500 index finished 35 points higher (or +1.2%).

Interest Rates: US 2-year treasury yields rose from 7 basis points and the US 10-year yield lifted by 5 basis points. Interest-rate markets are pricing 29 basis points of easing at the 19 September Federal Reserve meeting and a terminal federal funds rate of 0.97% (Fed funds rate currently 2.13%).

Australian 3-year government bond yields nudged higher, from 0.68% to 0.69%. The Australian 10-year bond yield rose from 93% to 0.97%. Interest-rate markets are pricing only 4 basis points of easing at the 3 September RBA meeting and a terminal rate of 0.37% (RBA cash rate currently at 1.00%).

Foreign Exchange: The US dollar index is up 0.2% on the day. EUR/USD fell from 1.1110 to 1.1080, underperforming in the wake of growing speculation a German fiscal stimulus plan is being fofmulated. Meanwhile, AUD/USD ground lower from 0.6789 to 0.6762. For now, the AUD/USD pair has formed a new trading range of 0.6750 to 0.6800.

Commodities: Oil prices gained ground overnight after a weekend attack on a Saudi oil facility by Yemen's Houthi forces threatened crude supplies and as traders looked for signs that top economies would take measures to counteract a global slowdown.

Australia: There was no major economic data released yesterday.

China:  The People Bank of China’s first fixing of its new lending measure should make debt a bit cheaper for Chinese firms. The central bank may set the Loan Prime Rate, or LPR, at 4.24%, according to a Bloomberg survey. That compares with 4.31% for the prior measure and the one-year benchmark of 4.35%. Chinese authorities are aiming to tie borrowing costs to financial markets, making them less sticky.

Eurozone: Speculation mounted overnight that Germany is preparing to shore up its economy. It involves a contingency plan; fiscal stimulus measures would be triggered in the event of a recession. The Bundesbank also warned in its monthly report overnight that GDP in Q3 could contract in Germany.

Eurozone core inflation for July was finalised at 0.9% year-on-year, as expected by consensus. However, the headline inflation measure was revised lower from 1.1% to 1.0% on a year-on-year basis.

Japan: The trade deficit widened in July from ¥33.9 billion to ¥126.8 billion in August. Exports fell by a deeper amount in the year to July compared with imports (-1.6% vs -1.2%).

New Zealand: Producer prices rose by 0.5% in Q2, after a drop of the same size in Q1. Wholesale inflationary pressures remain muted, despite the gain in Q1. In other data, the performance of services index improved from 53.0 in June to 54.7 in July. A reading above 50.0 indicates activity is likely to be expansionary in the period ahead.

United Kingdom: House prices dropped by 1.0% in August, after a fall of 0.2% in July, according to Rightmove data. However, prices in London remained under pressure, falling by 0.1% in July. Annual growth for the UK for the July period was 1.2%.

United States: Boston’s Federal Reserve President and voting member of the FOMC, Eric Rosengren said he believes monetary and fiscal policy is accommodative enough. Rosengren said wages and some inflation measures (Dallas Fed version) have increased and is concerned lower yields could motivate excessive risk taking. He doesn’t believe a 2% growth rate is sufficiently slow to warrant easing. Rosengren had dissented against the rate cut in July.

US President Trump took to twitter again overnight. Trump called on the Federal Reserve to cut rates “by at least 100 basis points” and claimed the US dollar “is so strong” that it’s hurting other parts of the world.

There were media reports overnight that White House officials are discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown. The talks are still in their early stages. Americans pay a payroll tax on their earnings, which is a 6.2% levy, used to finance Medicare and Social Security programs. The payroll tax was last cut during the Obama administration, to 4.2%, as a way to encourage more consumers to spend during the recent economic downturn. But the cut was allowed to reset back up to 6.2% in 2013.

 

Today’s key data and events:

AU RBA Board Meeting Minutes (11:30am)

EZ Construction Output Jun prev -0.3% (7pm)

UK CBI Trends Survey (8pm)

 

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