Bank of Melbourne

Morning Report

Main Themes: Investors remained nervous overnight, reflected in the rise in the volatility VIX index to above 20. Media reports that Chinese officials see a US-China trade deal as unlikely before the US election in 2020 weighed on investor sentiment.
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Main Themes: Investors remained nervous overnight, reflected in the rise in the volatility VIX index to above 20. Media reports that Chinese officials see a US-China trade deal as unlikely before the US election in 2020 weighed on investor sentiment.

Share Markets: US share markets finished lower following a seesaw session as investors digested the most recent developments on the US-China trade war. The Dow Jones closed 121 points weaker (or -0.5% and the S&P 500 index closed down 9 points (or -0.3%).

Interest Rates: US 2-year treasury yields ranged between 1.51% and 1.55%, while the 10-year yield fell from 1.52% to 1.47%. Interest-rate markets are pricing 26 basis points of easing at the September 19 Federal Reserve meeting and a terminal rate of 0.97% (Fed funds rate currently sits at the midpoint of 2.13%).

Australian 3-year government bond yields ranged between 0.68% to 0.71% and the Australian 10-year yield slipped from 0.94% to 0.88%. Interest-rate markets are pricing 3 basis points of easing at the September 3 RBA meeting and a terminal rate of 0.41% (cash rate is currently at 1.0%).

Foreign Exchange: The Australian dollar for much of the overnight trading session held a very narrow range that spanned just 20 pips. After sharp moves from mid July to early August, the AUD/USD exchange rate looks to be trying to consolidate at around 0.6750-0.6800, although remains vulnerable to further weakness in coming months.

Commodities: The WTI quote for crude oil rose to nearly US$55 a barrel. Gold also rose further but iron-ore prices fell 3.0%.

Australia: Speaking in Canberra yesterday about the significant reduction in Australia’s current account deficit, RBA Deputy Governor Guy Debelle warned that the developing threats to the global rules-based trading system were a risk to both domestic and world growth.

The current account deficit stood at just 0.6% of GDP in Q1, the lowest since the 1970s. Debelle argued that Australia’s large external account is not a source of vulnerability, as most foreign liabilities are denominated in Australian dollars and thus able to mitigate the downside risks of a currency shock. He did, however, warn that the system which has allowed this to take place over several decades was vulnerable to the tit-for-tat tariff increases in the US-China trade dispute.

On the topic of non-conventional monetary policy, Debelle noted that the experience of other countries such as the US, the UK and Canada suggested that the RBA would need to look at other measures if rates fell to 0.5% and its objectives were still not being met.

China: Industrial profits rose 2.6% in the year to July, turning positive after a 3.1% annual contraction in June. Companies reported an improved financial position, despite industrial production growing at a 17-year low in July. Weak profits this year have been behind lacklustre investment. The escalating US-China trade developments over recent months will test sentiment further.

United States: The Conference Board’s consumer confidence index fell 0.7 of a point to 135.1 in August, but printed well ahead of consensus expectations for an outcome of 129.0. August’s result shows consumers are remaining resilient in the face of escalating trade tensions and volatile markets. Indeed, households’ expectations for the labour market surged to a new 19-year high in August.

In other data, manufacturing sentiment in the Richmond Federal Reserve district bounced back from a 6½-year low of -12 in July to +1 in August. The recovery is encouraging, however, it pre-dates the latest escalation in US-China trade tensions.

News reports overnight referred to unidentified Chinese officials identifying US President Donald Trump's credibility as a key obstacle for China to reach a lasting deal with the US. Only a few negotiators in Beijing see a pact as actually possible ahead of the 2020 US election, as it would be dangerous for Xi Jinping's advisers to recommend he sign an accord to which Trump wouldn't adhere.

Former New York Federal Reserve President Bill argued in an opinion article that central bank officials should state explicitly they "won't bail out an administration that keeps making bad choices on trade policy."

 

Today’s key data and events:

AU Constr. Work Done Q2 exp -1.3% prev -1.9% (11:30am)

UK NBS House Prices Aug exp 0.1% prev 0.3% (4pm)

EZ Money Supply Jul y/y exp 4.7% prev 4.5% (6pm)

US Fed’s Barkin Speaks (2:20am)

US Fed’s Daly Speaks (7:30am)

 

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.

 

Besa Deda, Chief Economist Ph: 02-8254-3251