Bank of Melbourne

Morning Report

Main Themes: A range of easing political concerns, notably in Hong Kong, the UK and in Italy, drove a rebound in market sentiment. Additionally, Chinese economic data improved further easing concerns about the global outlook. Share markets rallied, although US bond yields were little changed. The Australian dollar is higher.
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Main Themes: A range of easing political concerns, notably in Hong Kong, the UK and in Italy, drove a rebound in market sentiment. Additionally, Chinese economic data improved further easing concerns about the global outlook. Share markets rallied, although US bond yields were little changed. The Australian dollar is higher.

Share Markets: Global shares rallied, supported by better signs of economic growth from China, and easing political risks. Yesterday, Hong Kong’s leader, Carrie Lam, announced she would formally withdraw the contentious extradition bill which has been one of the protesters key demands. The Hang Seng surged 3.9% as a result. In the US, the Dow rose 0.9% while the S&P500 rose 1.1%.

Interest Rates: The improvement in risk appetite was less evident in the US bond market. Yields on US treasuries were little changed– the US 10-year yield edged 1 basis point to 1.48%.

Yields implied by Australian bond futures were higher. Both 3 and 10-year yields were up 3 basis points.

Foreign Exchange: The US dollar weakened, supported by the diminishing risk aversion, and an easing in political risks around the world. The yen also weakened as sentiment improved. GBP rallied to above $1.22 against the US dollar after UK lawmakers stepped in to block a no-deal Brexit.  The Australian dollar  bounced after GDP growth came in as expected, suggesting markets were prepared for a worse result. AUD’s gains extended in the overnight session to trade back at 68 US cents this morning.

Commodities: Oil prices rose sharply, also helped by the broad improvement in market sentiment and the signs of a pick up in Chinese economic activity.

Australia: The Australian economy started to lose speed in the second half of last year and that deceleration has continued through to the first half of this year, steered by the cautious consumer and housing downturn. In the June quarter, GDP grew by 0.5% and the annual growth rate slowed from 1.7% in the March quarter to 1.4% in the June quarter, which is its slowest pace in nearly 10 years. The pace of growth remains well below the trend pace of growth of around 2.75%. Australia has traded in the Lexus for a Lada and is stuck in gear 2.

GDP growth in the June quarter was narrowly based and mostly attributable to consumption, especially by the government, and net exports. Dwelling investment, business investment and inventories detracted from growth in the quarter.

State final demand presented a mixed picture. WA and the ACT grew the fastest, bouncing back from a contraction in Q1 to each record 0.8% growth in Q2. NSW and QLD recorded no change in Q2 while Victoria (+0.5%) and Tasmania (+0.3%) recorded modest growth. SA contracted 0.2% for the second quarter in a row and there were signs from the NT that the negative effects of the unwinding of the LNG investment boom are starting to fade.

Mining output picked up over the quarter. Agriculture, forestry & fishing were the weakest sector. Construction, manufacturing and wholesale trade remained soft. Healthcare & social assistance remains the fastest growing sector on an annual basis, up 7.9% in the quarter.

While downside risks to the outlook remain, we expect some improvement from the middle of this year. A boost in household incomes from rate cuts and the tax rebates should flow through to household consumption. We expect a pick up in economic activity, but growth is likely to remain at a pace below trend. Moreover, there are downside risks from the global economy.

In other data, the AiG performance of services index improved from 43.9 in July to 51.4 in August. As the outcome is above 50.0 it suggests an expansion in activity in the period ahead.

China:  The Caixin purchasing managers’ index (PMI) for the composite in August improved from 50.9 in July to 51.6 in August. The services PMI also lifted in August, from 51.6 in July to 52.1 in August.

Europe:  Retail sales contracted 0.6% in July, in line with the consensus estimate. The decline partially reversed a 1.2% jump in June. There was better news however, in the services PMI, which was revised slightly higher in the final estimate for August, from 53.4 to 53.5 and an improvement from July, continuing to signal that the services sector is being reasonably well-supported, while manufacturing is languishing.

New Zealand:  The QV measure of house prices lifted 2.3% in the year to August, after an annual rise of 2.2% in July. In the three months to August, prices rose 0.3%, underpinned by a resurgence in investor activity.

United Kingdom: The House of Commons backed a bill that would prevent Prime Minister Boris Johnson taking the UK out of the European Union without a deal, and essentially forcing the government to request a three-month delay. Prime Minister Johnson has put forward the notion of a general election on October 15, but was rejected. The proposal needed two-thirds majority for support.  

United States: The US trade deficit narrowed from $55.5 billion in June to $54.0 billion in July, as growth in exports outpaced imports. The result preceded the latest round of tariff announcements, thus some frontrunning of imports is likely to take effect in coming months.

The run of commentary from Federal Reserve officials suggested a wide ranging debate about whether they should lower interest rates. New York Presidnet Williams said he was ready to “act as appropriate” and that the economy was in a “favourable” pace, a similar stance to Fed Chair Powell. Dallas Fed President Kaplan said the economy was “mixed” and expressed concern over the trade uncertainty had spilled over to weakness in consumer spending. The inverted yield curve was also being watched.

 

 

Today’s key data and events:

NZ All Buildings Q2 exp 1.3% prev 6.2% (8:45am)

AU Trade Jul exp $7.80bn prev $8.04bn (11:30am)

US Challenger Job Cuts Aug y/y prev 43.2% (9:30pm)

US ADP Employment Change Aug exp 148k prev 156k (10:15pm)

US Initial Jobless Claims w/e Aug 31 exp 215k prev 215k (10:30pm)

US Markit Services PMI Aug Final exp 50.9 prev 50.9 (11:45pm)

US Markit Composite PMI Aug Final prev 50.9 (11:45pm)

US Factory Orders Jul exp 1.0% prev 0.6% (12am)

US Durable Goods Orders Jul Final exp 2.1% prev 2.1% (12am)

US ISM Non-Mfg Index Aug exp 54.0 prev 53.7 (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.

 

Janu Chan, Senior Economist  Ph: 02-8253-0898