Bank of Melbourne

Morning Report

Main Themes: An attack from Trump on US Federal Reserve Chief Powell and a further escalation in rhetoric in the tensions between the US and China weighed heavily on financial market sentiment. Shares were down sharply, bond yields were also weaker. The US dollar is down, as is the Australian dollar.
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Main Themes: An attack from Trump on US Federal Reserve Chief Powell and a further escalation in rhetoric in the tensions between the US and China weighed heavily on financial market sentiment. Shares were down sharply, bond yields were also weaker. The US dollar is down, as is the Australian dollar.

Share Markets: Key US indices were down over 2%. The Dow closed 2.4% lower, the S&P500 fell 2.6% and the Nasdaq dropped 3.0%.

Interest Rates: Yields on US treasuries fell on the combination of falling risk appetites, a dovish message by Powell and as concerns mount for the US economy. US 10-year yields fell 8 basis points to 1.54%.

Foreign Exchange: The US dollar index is lower, while the risk aversion saw the Japanese yen outperform. USD weakened against most currencies following Powell’s speech which spoke of risks. Comments by Trump sparked talk of US dollar intervention, who complained of a “very strong dollar and a very weak Fed”. AUD grinded lower on weaker risk appetite and the trade tensions to sit at 67.4 US cents this morning. Today, markets will be closely watching the daily fix of the Chinese yuan in response to the trade war developments over the weekend.

Commodities: Prices on most commodities fell, including oil while gold prices rose on the latest bout of risk aversion.

Global: On Friday, China unveiled  tariffs of 5% or 10% on $75 billion worth of US goods. Trump later took to twitter to demand that American companies to leave China and to make more of their products in the US. After the market close, Trump announced an additional 5% tariff on existing tariffs, which included a lift from 25% to 30% from October 1 on the $250 billion worth of Chinese imports already facing tariffs. Trump also announced an increase in the planned tariffs from 10% to 15% on the remaining $300 billion worth of imports. These were previously announced to take effect on September, with approximately half delayed till December 15.

Australia: In a speech at the Jackson Hole symposium, RBA Governor Lowe spoke of the political shocks as fast becoming into economic shocks. On these global forces, the RBA had “absolutely no autonomy” and that central bank decisions were increasingly weighed by global forces rather than domestic ones. Many forces keeping down interest rates included increased savings demographic changes and the increased global supply of service workers, which results in “lower rates and an economic system that’s less inflation prone.” Therefore, the RBA had little choice in that “if the world interest rate changes, we have to change ours too”. Nonetheless, he emphasized a  case for a “very flexible inflation target” and noted that while financial market participants “worry” about inflation not meeting its target, the community would say “surely you’ve got more important things to worry about” and pointed out that “achieving the target isn’t the end goal. Rather the end goal is welfare maximisation”.

Japan: Consumer prices excluding food and energy prices rose by 0.6% in the year to July, after an annual gain of 0.5% in June. The data highlights that inflation pressures remain muted.

New Zealand: Retail sales excluding inflation rose by 0.2% in Q2, after a jump of 0.7% in Q1. The gain in Q2 was the smallest gain since Q1 of 2018. The decline was led by a drop in fuel sales, but even growth in core retail sales was modest in the quarter.

United States: Federal Reserve Chair Powell continued to state that the central bank would “act as appropriate” although avoided providing an explicit commitment to further rate cuts. Powell spoke of “significant risks” to the economy, and in particular highlighted trade policy uncertainty as “playing a role in the global slowdown and in weak manufacturing and capital spending in the United States. However, there were “no recent precedents to guide any policy response to the current situation, and that monetary policy “cannot provide a settled rulebook for international trade”.  While there remained an openness for further monetary easing, Powell’s comments emphasize the limitations in what the Fed can do to support the economy.

President Trump in response, criticized Powell for doing “nothing” and questioned who is “our bigger enemy” between Powell and Chinese President Xi.

Federal Reserve Vice Chair Clarida said later that “we take our policy decisions one meeting at a time”.

New home sales slumped 12.8% in July, although June’s outcome was revised substantially higher to their highest since 2007. The  increase in June is now reported as 20.9% up from up from 7.0% previously. Looking through the volatility, an upward trend could be beginning to emerge, suggesting some modest positive impact to the housing market from lower mortgage rates.

 

Today’s key data and events:

NZ Trade Jul exp -$277mn prev $365mn (8:45am)

US Chicago Fed National Index Jul prev -0.02 (10:30pm)

US Durable Goods Orders Jul exp 1.3% prev 1.9% (10:30pm)

US Dallas Fed Mfg Act. Ind. Aug exp -1.0 prev -6.3 (12:30am)

 

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