Main Themes: Investor confidence got a boost overnight from fresh European Central Bank (ECB) stimulus and more signs of thawing in US-China trade relations. US and European bourses rose while bond yields were volatile, ending the session mostly higher. The ECB cut its policy rate and introduced a new asset purchasing programme, as expected.
Share Markets: US and European share markets lifted on the ECB decision and President Trump announcing a two-week delay on increased tariffs on Chinese imports worth billions ahead of upcoming negotiations. The Dow Jones closed up 0.2% while the S&P500 rose 0.3%, tantalisingly close to its all-time high. The DAX ended the session 0.4% higher, but down from its intra-day high of 0.9% immediately following the ECB announcement.
Interest Rates: Global yields closed mostly higher as renewed optimism around trade hopes offset fresh stimulus from the ECB.
Yields fell immediately after the ECB cut its policy rate and announced an additional easing package, however began to move higher as doubts crept in about the effectiveness of the move during Draghi’s press conference. US treasuries closed up across the curve, including a 4 basis point rise in the 10-year to 1.77% and a 5 basis point increase in the 2-year to 1.72%.
German 10-year yields increased 3 basis points to -0.54% while Italy’s 10-year bond yield closed 11 basis points lower at 0.86% after reaching a record low yield of 0.76% over the course of the session.
Foreign Exchange: The US dollar index closed lower, reversing earlier gains as investors tempered their response to the ECB’s stimulus package. Following a sharp fall, the euro bounced back during Draghi’s press conference as markets reassessed whether the decision would have a meaningful impact. The Australian dollar traded mostly higher overnight, but ended the session little changed at 68.65 US cents.
Commodities: Oil fell on reports from OPEC that inventories rose above their five year average and the IEA predicted a ‘daunting’ oil market surplus in 2020. WTI was down almost 1% to US$55.1 per barrel.
Saudi Arabia continued to pressure other OPEC members to comply with production cuts and pledged to continue over-complying itself.
Global: Yesterday, US President Trump over twitter said that the US has agreed to delay increasing tariffs on $250 billion worth of Chinese imports from October 1 to October 15. Trump said the delay was a “gesture of good will” and was at the request of the Vice Premier of China, Liu He, and due to the People’s Republic of China’s 70th anniversary.
The concession follows an olive branch extended by China to exempt 16 types of US goods from tariffs on Wednesday.
Australia: Consumer inflation expectations edged down from 3.5% in August to 3.1% in September, the lowest since June 2015. The extended period of low inflation is beginning to feed into expectations that low inflation is here to stay.
Europe: As expected, the ECB’s Mario Draghi announced policy rate cuts and a restart of QE. The ECB lowered its key deposit rate to -0.5% from -0.4% and made an indefinite commitment to buy 20 billion euros worth of bonds per month starting November. Additionally, it introduced a two-tiered system, which exempts part of banks’ excess liquidity from negative rates.
After a strong initial reaction, markets retreated, ostensibly because of concerns about the impact of the decision. The French, German and Dutch central banks reportedly opposed the decision to restart quantitative easing, adding to doubts.
Japan: Machine orders fell 6.6% in July, partially offsetting a 13.9% jump in June. Some decline was expected after June’s surge, but the July result was better than expectations for an 8.0% decline. Business spending is continuing to hold up reasonably well in spite of a slowing global economy. However, downside risks remain, particularly given weaker confidence in business surveys, and a sales tax hike due to take effect in October.
United States: Core consumer prices rose 0.3% in August, according to the latest Census Bureau data. Underlying inflation is now running 2.4% higher in year-on-year terms, above the Fed’s 2% inflation target. Despite the increase in core inflation and further data released overnight showing a fall in weekly initial jobless claims, a cut to the Fed funds rate is widely expected during next week’s meeting.
Today’s key data and events:
NZ BusinessNZ Mfg PMI Aug prev 48.2 (8.30am)
JN Industrial Production Jul final prev 1.3% (2.30pm)
EZ Trade Balance Jul exp €17.5bn prev €17.9bn (7.00pm)
US Import Price Index Aug exp -0.5% prev 0.2% (10.30pm)
US Retail Sales Aug exp 0.2% prev 0.7% (10.30pm)
US UoM Consumer Sentiment Sep exp 90.8 prev 89.8 (12.00am)
US Business Inventories Jul exp 0.3% prev 0.0% (12.00am)
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.
Nelson Aston, Economist Ph: 02-8254-1316