Bank of Melbourne

Morning Report

Main Themes: Investors digested the latest trade developments, which included US President Trump reiterating overnight that he is not prepared to make a deal with China. US Secretary of State Mike Pompeo overnight said that Huawei Technologies and other Chinese companies pose national security threats to the US.
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Main Themes: Investors digested the latest trade developments, which included US President Trump reiterating overnight that he is not prepared to make a deal with China. US Secretary of State Mike Pompeo overnight said that Huawei Technologies and other Chinese companies pose national security threats to the US.

Investors are also looking ahead to the Federal Reserve minutes published later this week and the meeting of central bankers in Jackson Hole.

Share Markets: US share markets retreated overnight, as investors digested the latest trade news and awaited more clues on monetary policy. The Dow Jones fell by 173 points (or -0.7%) and the S&P 500 index dropped 23 points (or -0.8%).

Interest Rates: US bond yields fell across the yield curve. US 2-year yields fell by 3 basis points and the 10-year yield fell by 5 basis points.

Foreign Exchange: The Australian dollar rose against the US dollar after the RBA published its minutes for the 6 August board meeting. These minutes revealed an RBA that was more confident about the domestic economic outlook, leaving aside the near-term outlook and global uncertainties. The AUD/USD pair moved from a low of 0.6755 before the minutes to a high of 0.6795. The AUD/USD needs to break convincingly above 0.6820 to be assured of a new trend higher. The AUD/USD, however, was capped near 0.6800 yesterday. During overnight trade, the AUD/USD traded a very narrow range of 0.6770-0.6785. Our view remains that the AUD/USD should move lower by year’s end, largely due to the deteriorating global economic outlook.

Commodities: Oil edged higher overnight amid analyst forecasts that US crude stockpiles last week fell for the first time in three weeks.

Australia: The minutes of the RBA board meeting in August were published yesterday. They revealed an RBA more confident about the outlook for the domestic economy, leaving aside the near-term outlook, and more worried about the global economic outlook.

The RBA has shifted to give greater weight to global economic developments in setting cash-rate policy. In the conclusion of the minutes, the RBA noted “the Board judged it appropriate to assess developments in the global and domestic economies before considering further change in the setting of monetary policy”. This paragraph is in contrast to recent statements where the emphasis was on the labour market.

On jobs, the RBA noted “there appeared to have been more spare capacity in the labour market than previously appreciated”.

However, while the RBA concerns around the labour market have risen, the RBA seems more hopeful and confident on the real economy. The RBA stated “risks around the outlook were more balanced than they have been for some time”.

The RBA continues to expect growth to recover to trend in 2020 of 2.75% and lift to 3% in 2021. We expect growth will fall short of these expectations, making it hard for the unemployment rate to move to the desired rate and challenging for inflation to move back into the RBA’s target band.

Therefore, we continue to expect two more rate cuts from the RBA – one in October and one early next year.

Monetary policy becomes a blunter instrument at these lower levels. So the possibility of the RBA having to pursue unconventional policies as they take the cash rate from 0.75% to 0.50% or after taking the cash rate to 0.50% is a growing risk.

The RBA minutes noted the board members reviewed the experience of other advanced economies with unconventional policy measures. The minutes noted one key lesson from the international experience was that the effectiveness of these measures depended upon the specific circumstances facing each economy and the nature of its financial system. Further, “a package of measures tended to be more effective than measures implemented in isolation”.

Eurozone: Italian Prime Minister Giuseppe Conte said he'll resign, while blaming the country's current political crisis on "irresponsible" Deputy Premier Matteo Salvini. President Sergio Mattarella is expected to accept the resignation and could begin consultations on a possible alternative government as soon as today.

United States: US President Trump renewed his call for a "big" Fed rate cut and reiterated he is not ready to make a deal with China. Trump also called for Russia to be readmitted to the G-7 and threatened to tax European automobiles.

US Secretary of State Mike Pompeo also told CNBC that Huawei Technologies Co. and other Chinese companies pose national security threats to the US.

 

Today’s key data and events:

AU Leading Index Jul prev -0.08% (10:30am)

AU ABS Skilled Vacancies Jul prev -0.6% (11am)

NZ Credit Card Spending Jul prev 1.5% (1pm)

US Existing Home Sales Jul exp 5.39mn prev 5.27mn (12am)

US Federal Reserve Meeting Minutes (4am)

 

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