Bank of Melbourne

Morning Report

Main Themes: Trade remarks from US Secretary Steven Mnuchin and a UK delaying a no-deal Brexit helped soothe investor anxiety overnight about the outlook. US equity bourses rose, US bond yields jumped and the US dollar was little changed.
Share

Main Themes: Trade remarks from US Secretary Steven Mnuchin and a UK delaying a no-deal Brexit helped soothe investor anxiety overnight about the outlook. US equity bourses rose, US bond yields jumped and the US dollar was little changed.

Share Markets: US share markets ended mixed, giving up early gains. The Dow Jones closed up 38 points (or +0.1%) and the S&P500 index dropped 0.3 of a point (or flat in percentage terms).

Interest Rates: US bond yields lifted across the curve; the 2-year yield rose by 5 basis points and the 10-year yield lifted by 8 basis points.

Australian 3-year government bond yields rose from 0.82% to 0.87% and the 10-year yield rose from 1.05% to 1.08%.

Interest-rate markets are attaching a probability of 34% to an RBA rate cut in October. This probability dropped significantly after the RBA board meeting this month failed to explicitly suggest another rate cut was on the way soon.

Foreign Exchange: The AUD continued to appreciate overnight, reaching a high of USD0.6876. The AUD struck a low of 0.6677 on September 3, which represents a key support level, just ahead of the RBA board meeting that afternoon. The AUD/USD has improved around US 2 cents since September 3. Given the sharp movement higher and it is near resistance, we expect the AUD/USD might choose to consolidate around here for now.

The outperforming currency overnight among the G10 was the British pound, after chances of a no-deal Brexit receded further. GBP/USD jumped from an overnight low of 1.2234 to a high of 1.2385 where it is currently trading near. AUD/GBP fell from 0.5604 towards 0.5550.

Commodities: Oil jumped to the highestin more than a month, after investors were reassured that OPEC would continue to trim output to help balance the markets. Saudi Energy Minister Prince Abdulaziz bin Salman said there will not be radical change in the cartel's policy. A committee made up of key members from the coalition will meet in Abu Dhabi later this week to review progress of their deal to cut supply.

Australia: The latest home lending data point to further signs of recovery in the housing market. The total number of new home loans approved for owner occupiers increased 4.2% in July, the fastest monthly growth since June 2015. Compared with a year ago, activity remains subdued (-8.7%), but the pace of decline has slowed markedly and the annual rate of contraction improved to single digits for the first time since November 2018.

Investors appear to be returning to the market after an extended period on the sidelines. The total value of new loans to investors jumped 4.7%. Multiple rate cuts and tax breaks appear to be supporting the sector. However, building activity will remain constrained by a decline in building approvals, led by the fall in house prices over much of the past 2 years. Cladding and building integrity issues are also weighing on sentiment.

The percentage of first-home buyers as a proportion of all dwellings increased to 19.6%. This proportion now stands at the highest in 7½ years.

Japan: The final outcome for GDP in the second quarter was growth of 0.3% and annualised growth of 1.3%. The final outcome is lower than the preliminary reading of annualised growth of 1.8% and due largely to a sharp downward revision in business investment. The Q1 GDP rise was also downwardly revised to be a 2.2% gain from a 2.8% increase.

In other data, the current account surplus narrowed to ¥1647.1 billion in July, from ¥1941.9 billion in June.

United Kingdom: The UK bill that stops a no-deal Brexit on 31 October became law. The law forces the Prime Minister to ask for a three-month Brexit delay if he hasn’t achieved a deal by 19 October. Prime Minister Johnson may try to call for a snap election again, but he needs the votes of 2/3 of MPs and last week he fell well short of the required votes.

Members of Parliament also voted to force Boris Johnson’s government to publish its preparations for a no-deal Brexit, as well as correspondence related to the suspension of Parliament. House of Commons Speaker John Bercow unexpectedly announced overnight that he plans to step down by October 31. Bercow has been a thorn in the government’s side and has given opportunities to opponents of a no-deal Brexit to have their say and take action in the Commons to prevent it.

Industrial production rose by 0.1% in July, after falling by 0.1% in June. In annual terms industrial production remains depressed with a contraction of 0.9% registered in July.

Monthly GDP data showed the UK expanded by 0.3%, beating consensus expectations for an expansion of only 0.1%. However, over the three months to July, GDP was flat and production is down 0.3%, reflecting the impact of Brexit-related uncertainty.

United States: There was no major economic data published overnight. On the trade front, US Treasury Secretary Steven Mnuchin said overnight that trade talks have "made a lot of progress." He added that the fact Chinese officials, including People’s Bank of China Chief Yi Gang, are coming to Washington in October is a "sign of good faith."

 

Today’s key data and events:

AU NAB Business Survey Aug (11:30am)

   Business Conditions Aug prev 2

   Business Confidence Aug prev 4

CH CPI Aug y/y exp 2.7% prev 2.8% (11:30am)

CH PPI Aug y/y exp -0.9% prev -0.3% (11:30am)

JN Machine Tool Orders Aug y/y prev -33.0% (4pm)

UK Avg Weekly Earnings 3Mths Jul exp 3.7% prev 3.7% (6:30pm)

UK ILO Unemployment Rate 3Mths Jul exp 3.9% prev 3.9% (6:30pm)

US NFIB Small Business Optimism Aug exp 103.5 prev 104.87 (8pm)

US PPI Final Demand Aug exp 0.0% prev 0.2% (10:30pm)

 

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