Bank of Melbourne

Morning Report

Main Themes: The US jobs data report disappointed, pushing US bond yields and the US dollar slightly lower.

Main Themes: The US jobs data report disappointed, pushing US bond yields and the US dollar slightly lower.

Share Markets: The Dow Jones rose by 69 points (or +0.3%) and the S&P 500 index added 3 points (or +0.1%).

Interest Rates: US 2-year treasury yields fell from 1.57% to 1.51% following the jobs data, closing at 1.54%. The US 10-year yield falling from 1.60% to 1.54% and closing at 1.55%. Markets are pricing 25 basis points of easing at the 19 September Federal Reserve meeting and a terminal rate of 0.93% (Fed funds rate currently 2.13%).

Australian 3-year government bond yields fell from 0.85% to 0.81% and the 10-year yield from 1.13% to 1.04%. Interest-rate markets are pricing 11 basis points of easing at the 1 October RBA meeting and a terminal rate of 0.50% (RBA cash rate currently at 1.0%).

Foreign Exchange: The US dollar index closed lower in Friday trade. EUR/USD fluctuated between 1.1020 and 1.1057, reversing US-jobs-related-data gains to close little changed. USD/JPY fell from 107.00 to 106.62 post jobs data, but later retraced to 106.90. AUD/USD extended earlier gains, from 0.6830 to a one-month high of 0.6862. The outperformer was the NZD/USD, which rose from 0.6380 to 0.6444. Meanwhile, AUD/NZD fell from 1.0670 to 1.0633, before closing at 1.0656.

Commodities: Oil was higher, while gold fell in Friday trade.

Australia: The AiG performance of construction index rose from 39.1 in July to 44.6 in August, the highest in five months. The improvement reflected house building, while apartment construction and engineering construction weakened. Despite the improvement, the construction remains in contraction territory, suggesting conditions remain weak overall in construction.

China: In European trade on Friday, the People’s Bank of China (PBoC) announced a 0.5% reduction in banks’ reserve ratios (the amount of cash a bank must hold as reserves) effective from September 16. It will be at its lowest level since 2007. There will be an additional cut of 1% for some provincial-based banks from October 15. The cuts will release CNY900bn of liquidity. The PBoC emphasised the easing is not large.

The trade balance for August fell from CNY310bn to CNY240bn with export growth less than expected. Shipments to the US fell by 16% vs a year earlier, suggesting the trade war is having an impact.

Eurozone: Germany’s industrial production fell 0.6% in July and by 4.2% on a year ago. The data underscores the softening of the economy in front of this week’s central bank meeting (Thursday). This should strengthen the hands of the doves who have intimated substantial stimulus.

Final Q2 GDP for the Euro area region registered at 0.2% in the June quarter, which was unchanged from the initial reading. However, there was a minor lift in the annual rate to 1.2%, from 1.1% in the preliminary report.

Japan: Household spending rose 0.8% in the year to July, which was in line with expectations. For the moment, there is little sign of any pull-forward effect ahead of a sales tax hike in October. Nonetheless, the annual pace of spending has increased for eight consecutive months, after contracting over much of 2018.

United States: Non-farm payrolls in August grew by 130k, below market consensus for a rise of 150k.  August’s gain was also bolstered by census hiring. Moreover, the last two months were revised downwards by 20k in total. The underlying pace of jobs growth in 2019 is settling at lower levels compared with recent years. The monthly average gain over the 12 months to August is +173k, which is the weakest in almost two years.

The alternative household survey portrayed a lot more strength too. There were 590k jobs created in August, following +283k in the previous month. Wage earnings were at 0.4% in the month, which was encouraging, as it left the annual pace throttling above 3% for yet another month (3.2%).

Federal Reserve Chair Powell said the Federal Reserve is not forecasting or expecting either a US or global recession. The US labour market is still tightening at the margin and the consumer is in good shape. However, there are risks which the Fed is monitoring very carefully, including slowing global growth and trade policy uncertainties that are weighing on business decisions. The Fed is also watching closely the persistently low inflation outcomes. Powell repeated the Fed will continue to act as appropriate to maintain the expansion.


Today’s key data and events:

JN Current Account Jul exp ¥2047.2bn prev ¥1211.2bn (9.50am)

GDP Q2 final exp 0.3% prev 0.4% (9.50am)

AU Housing Finance (ex refi) Jul (11.30am)  

   No. Owner Occupier exp 1.0% prev 0.4%   

   Value Investor exp 0.5% prev 0.5% 

   Value Owner Occupier exp 1.0% prev 1.9%

US Consumer Credit Jul exp $16.0bn prev $14.6bn (5am)


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