Bank of Melbourne

Morning Report

Main Themes: A thawing in trade tensions was modestly supportive of sentiment, after China exempted tariffs on 16 types of US goods. Shares were modestly higher. The AUD was supported by expectations of additional policy support in China. Markets are also awaiting the European Central Bank (ECB) tonight, which is widely expected to provide additional stimulus measures.
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Main Themes: A thawing in trade tensions was modestly supportive of sentiment, after China exempted tariffs on 16 types of US goods. Shares were modestly higher. The AUD was supported by expectations of additional policy support in China. Markets are also awaiting the European Central Bank (ECB) tonight, which is widely expected to provide additional stimulus measures.

Share Markets: Shares across Europe and the US were modestly higher. In the US, stronger gains were witnessed in the tech sector, which have been front and centre of the US-China trade conflict. The Nasdaq rose 1.1%, while the Dow closed 0.9% higher and the S&P500 lifted 0.7%.

Interest Rates: Yields on US treasuries at the longer end of the curve were slightly higher. US two-year yields were flat, although US 10-year yields were 1 basis point higher at 1.74%, and likely boosted by the pickup in producer price inflation.

Foreign Exchange: The US dollar index edged higher on the easing trade frictions. A weaker euro also played a part on expectations of additional stimulus measures ahead of the European Central Bank (ECB) policy meeting tonight. The Australian dollar jumped from a low of 68.50 US cents to 68.79 US cents on a tweet from the Chinese State-run Global Times editor Hu (see below for more details), but then pared those gains later on.  

Commodities: Oil prices fell, following a Bloomberg report that Trump was considering easing sanctions on Iran. Gold rose ahead of expectations of stimulus from the ECB tonight.

China: Yesterday, China announced an exemption on tariffs for 16 types of US products including anti-cancer drugs. While over 5000 products are subject to China’s additional tariffs including soybeans and pork, the announcement could reflect an olive branch ahead of negotiations due next month or for economic reasons by exempting products which are not easily substituted from elsewhere. US President Trump said that the exemptions were “a big move”.

Earlier in the afternoon, a tweet from Global Times editor Hu Xijin suggesting that China will implement measures to ease the impact of trade tensions fuelled speculation that a larger stimulus response could be in store for the world’s second largest economy. There were no details, but the Global Times is a Chinese state-controlled newspaper.

Australia: Consumer confidence slipped in September, according to the Westpac-MI Consumer Confidence Survey. The Westpac-MI Index of Consumer Sentiment declined by 1.7% to 98.2, below the 100 mark that separates expansion from contraction.

Most major indicators in the report fell over the month, including both current and expected measures of family finances. The deterioration in consumers’ perceived financial situation came despite the Federal government’s tax offsets. An additional question in the survey revealed that just over 16% of respondents had received a payment. Of those, 29% said they planned to spend it all while 16% intended to spend over half.

A bright spot in the report was consumers’ longer term expectations for the economy. The index tracking respondents’ view of the economy in the next 5 years posted a 2.1% rise over the month.

The downwards trend in consumer confidence in recent months injects a note of caution to the outlook for consumer consumption.

Europe: In a news article published by Reuters, two unidentified sources said that the European Central Bank (ECB) would cut some of its growth forecasts, to be not far above 1% both this year and next, and to show only a modest increase in underlying and headline inflation over coming years. The news comes ahead of a key ECB policy meeting tonight, in which the central bank is expected to announce additional stimulus measures.

New Zealand: New Zealand recorded an increase in annual net migration in July. Migration had been on a slowing trend,  but the latest estimates suggest a turnaround. There were an estimated 52,700 net long term arrivals in the year to July, compared with 48,700 in the 12 months to July 2018. Net immigration peaked in 2016 at 63,900 in 2016.

United States: Producer price inflation picked up from 1.7% in July to 1.8% in August. The core measure (excluding food and energy) was also higher, edging up from an annual pace of 2.1% to 2.3%. It follows a downward trend in producer price inflation over the course of this year, after peaking at 2.9% in December 2018. Recent data is indicating  some stabilising in price pressures over the past few months.

 

Today’s key data and events:

NZ Food Prices Aug prev 1.1% (8:45am)

UK RICS House Price Balance Aug exp -10% prev -9% (9:01am)

JN Producer Price Index Aug exp-0.2% prev 0.0% (9:50am)

JN Core Machine Orders Jul exp -8.0% prev 13.9% (9:30am)

AU MI Consumer Inflation Expectations Sep prev 3.5% (11am)

EZ ECB Policy Meeting exp -0.6% prev -0.4% (9:45pm)

EZ ECB’s Draghi Speaks After Policy Decision (10:30pm)

US Consumer Price Index Aug exp 0.1% prev 0.3% (10:30pm)

US Initial Jobless Claims w/e Sep 7 exp 215k prev 217k (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.

 

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