Bank of Melbourne

Morning Report

Main Themes: A number of US Federal Reserve speakers overnight provided some hawkish undertones to the outlook for the US federal funds rate. Investors are now eagerly awaiting a speech by US Federal Reserve Chair, Jerome Powell, tonight for clues on the central bank’s monetary policy.
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Main Themes: A number of US Federal Reserve speakers overnight provided some hawkish undertones to the outlook for the US federal funds rate. Investors are now eagerly awaiting a speech by US Federal Reserve Chair, Jerome Powell, tonight for clues on the central bank’s monetary policy.

Share Markets: The Dow Jones rose by 50 points (or +0.2%) and the S&P 500 index slide 2 points (or -0.1%), as a fall in US jobless claims offset data showing a contraction in US manufacturing activity.

Interest Rates: US 2-year treasury yields rose from 1.54% to 1.61% and the US 10-year yield rose from 1.56% to 1.62%. Markets are pricing 24 basis points of easing at the September 19 Federal Reserve meeting.

Australian 3-year government bond yields rose from 0.67% to 0.70% and the Australian 10-year yield from 0.93% to 0.95%. Interest-rate markets are pricing 2 basis points of easing at the September 3 RBA meeting and a terminal rate of 0.41% (RBA cash rate currently at 1.0%).

Foreign Exchange: The US dollar index is down modestly on the day. EUR/USD is little changed at 1.1085 after fluctuating in a 50 pip range. GBP/USD outperformed, jumping from 1.2150 to 1.2273 after German Chancellor Merkel said a solution to the Irish border backstop issue was possible. USD/JPY remained inside a 106.25-106.65 range. AUD/USD slipped from 0.6775 to 0.6751, but remained within recent trading ranges. Underperformer NZD/USD extended yesterday’s fall, from 0.6390 to 0.6362 – the lowest since January 2016. Meanwhile, AUD/NZD extended yesterday’s rise, from 1.0600 to 1.0616 – the highest since early June.

Commodities: Oil and gold edged lower overnight.

Australia: Each of the purchasing managers’ indices (PMIs) for services, manufacturing and the composite deteriorated in July. The services and composite PMIs moved below the key 50.0 level, which indicates a contraction in activity is likely in the period ahead. The manufacturing PMI slipped only modestly, from 51.6 in July to 51.3 in August.

Eurozone: Eurozone flash purchasing managers indices (PMIs) beat consensus forecasts, but the manufacturing sector remains in contraction. Markit warned of weakness in Q3 and a technical recession (manufacturing 47.0, est. 46.2; services 53.4, est. 53.0 and composite 51.8, est. 51.2). There was a more notable lift in the French surveys with a less negative outlook than that of Germany and the Eurozone.

The minutes of the European Central Bank (ECB) meeting in late August underscored their weak economic outlook for the region and need to examine and implement further and substantial easing.

United Kingdom: UK’s Prime Minister Boris Johnson highlighted the potential of alternative arrangements to the Irish border backstop as he met with French President Macron and discussions were described as “complete and constructive”. The release of an Irish border paper by Prosperity UK has been seen as grounds to progress Brexit talks, although many obstacles remain.

United States: Kansas City Fed business survey missed expectations in August, slipping to -6 (est. +1, prior -1) in “its largest monthly drop in over three years” as respondents cited negative impacts from the latest round of US tariffs on China.

The flash PMIs for August were also disappointing for all components. Manufacturing PMI fell into contraction territory at 49.9 (est. 50.5,) and both services (est. 52.8, prior 53.0) and composite (prior 52.6) PMIs slipped to 50.9. Markit cited a marked fall in new orders, to the slowest rise in a decade and a clear softening of the economy in Q3 due to headwinds on spending and lower prospects for domestic growth.

The leading index for July managed a mild lift of +0.5% (est. +0.3%, prior revised from -0.3% to -0.1%), but was overshadowed by the weak US August surveys above.

Data from the US Labor Department showed initial claims for state unemployment benefits dropped more than expected last week, suggesting the labour market was holding firm.

Kansas Federal Reserve President George spoke at the start of the Jackson Hole gathering of global central bankers, stating that she was not ready to cut rates further without seeing evidence of a slowdown, noting that the economy was in a good place.

Philadelphia Federal Reserve President Harker said he reluctantly supported the rate cut in July to bring policy back to neutral, and thought the Fed should now remain on hold and monitor developments.

Finally, Dallas Federal Reserve President Kaplan said he’d like to avoid having to take further action, but has an “open mind”. He also added that the Federal Reserve’s GDP forecast of 2% growth has risks to the downside. Kaplan is watching if manufacturing weakness and global growth deceleration “seeps” into the strong US consumer economy.

 

Today’s key data and events:

NZ Retail Sales Ex Inflation Q2 exp 0.3% prev 0.7% (8:45am)

JN CPI Jul y/y exp 0.6% prev 0.7% (9:30am)

Annual Central Bankers’ Symposium, Jackson Hole (11am+)

US New Home Sales Jul exp 0.5% prev 7.0% (midnight)

US Federal Reserve Fed Chair Powell Speech (12am)

 

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