Main Themes: The price of oil fell sharply as Aramco officials confirmed they had restored just under half of the daily output lost in the weekend’s missile attacks. US treasury yields moved lower a day ahead of the Federal Open Market Committee’s (FOMC) interest rate decision.
Share Markets: US share markets eked out minor gains overnight as investors took a wait-and-see approach ahead of the Fed policy decision due tonight. The Dow Jones closed 0.1% higher and the S&P500 edged up 0.3%. Gains in consumer goods offset a pullback in energy companies, which pared Monday’s gains following the fall in the oil price.
Interest Rates: The yields on most countries’ government debt fell as the FOMC began its two-day meeting. The decision is widely expected to be a 25 basis points cut to the Fed funds rate but there remains deep division among members about the outlook for the economy and the path of future monetary policy. Concerns that tensions in the middle-east could once-again flare up appeared to influence a shift towards safe-haven assets while the possibility of an oil shortage amid already weak global economic growth also loomed.
US 10-year yields fell for the second straight session to 1.81% (-3 basis points) and the 2-year bond fell 3 basis points to 1.73%.
For the first time in a decade, the New York Fed conducted a repurchasing agreement operation to calm markets as it grappled with the technical implementation of the Fed funds rate. The average Fed funds rate stood at 2.25% overnight, at the top of the target rate of 2-2.5% (the Fed usually prefers it to be in the middle of this range). There was a $53 billion repurchasing agreement operation in order to boost liquidity, which has been squeezed in recent days for some borrowers.
Foreign Exchange: The US dollar slipped lower after trading in a relatively narrow range overnight. Falling oil prices and a stronger Euro weighed on the US dollar index, which was last trading around 0.38% lower. Better-than-expected economic data from the EU lifted the euro 0.59% to US$1.1065. Meanwhile, the pound rose near its 6-week high, despite Prime Minister Boris Johnson reaffirming his pledge to remove the UK from the European Union by October 31.
The Australian dollar is currently buying 68.64 US cents.
Commodities: Oil markets were once again in the spotlight overnight. This time, prices plunged as Aramco officials confirmed they had restored just under half of the daily output at the Abqaiq plant. There has been slower progress than markets had expected in resuming supply. The facility is now producing about 2 million barrels a day against pre-attack levels of 4.9 million. The weekend’s attacks cut world supply by about 5% and sparked concerns of a global oil shortage. Overnight, Donald Trump said the US would not need to tap into its strategic oil reserve at this point. WTI futures fell $3.80 per barrel to $59.3.
Gold and other precious metals rose as geopolitical concerns were ignited following media reports that the attack on the Saudi oil facility originated from Iran and investors weighed the upcoming Fed policy decision, expecting a cut.
Australia: The minutes from the September Reserve Bank (RBA) board meeting were published today. Overall, the tone was tentative in the wake of escalating trade tensions between the US and China and signs of a weakening global growth outlook. Domestically, the key uncertainty continued to be the outlook for consumption. Through its liaison with retailers, the bank found little evidence of increased spending following the tax cuts for low and middle income households. Members took a more optimistic view on the sluggish response in spending by noting that even if consumers were holding onto their tax cuts in order to pay debts, it would still bring forward the point at which households would increase their spending. The RBA was tight-lipped about the timing of the next move, saying only that they would consider further cuts to the cash rate if it was needed to support growth and achieve its 2-3% per annum inflation target. We expect the RBA to make two more cuts in the current easing cycle. We favour October and early next year as labour market outcomes remain soft and global uncertainties take a further toll on business and consumer confidence.
Australia-wide dwelling prices fell 0.7% in the June quarter, according to the ABS. This data is not yet showing evidence of the stabilisation in prices in the monthly CoreLogic series which has become evident in more recent months, particularly over July and August. Residential property prices declined in all capital cities except for Hobart over the June quarter.
Europe: The ZEW German consumer confidence survey showed consumers were less downbeat about the future, with the expectations component registering -22.5 compared with -44.1 in August. The gauge of the current situation worsened though, falling to -19.9 from -13.5.
United States: Factory output data for August surprised the market, rising 0.5% following a 0.4% decline in July. Total industrial production was up 0.6%. The latest data offer hope that the manufacturing sector may be stabilising, however a transitory boost from mining last month and significant headwinds from trade uncertainty inject a note of caution.
Today’s key data and events:
NZ Current Account Q2 prev $0.675bn (8.45am)
AU WBC Leading Index Aug prev 0.14% (10.30am)
UK CPI Aug exp 0.5% prev 0.0% (6.30pm)
US Building Permits Aug exp -1.3% prev 6.9% (10.30pm)
US Housing Starts Aug exp 5.0% prev -4.0% (10.30pm)
US FOMC Policy Decision exp 1.75%-2.00% prev 2.00%- 2.25% (4am)
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