Bank of Melbourne

Morning Report

Main Themes: The Federal Open Market Committee (FOMC) cut the federal funds rate overnight by 25 basis points, but dissension over both the decision and further action reigned.

Main Themes: The Federal Open Market Committee (FOMC) cut the federal funds rate overnight by 25 basis points, but dissension over both the decision and further action reigned.

Share Markets: US share markets erased losses as the lack of Fed unity implied less easing going forward. The S&P 500 ended little changed (+1 point or flat in daily percentage terms) and the Dow Jones edged up 36 points (or +0.1%). Financial companies that benefit from higher rates rallied.

Interest Rates: US 2-year treasury yields jumped from an intraday low of 1.67% to 1.77% in response to the Federal Reserve’s rate cut and closed 4 basis points higher. The US 10-year yield rose from an intraday low of 1.74% to 1.80%. Markets were disappointed at the lack of dovish guidance, but continue to expect a lower Federal funds rate, closer to 1.20% eventually (vs 1.88% now).

Australian 3-year government bond yields bounced with US yields (although to a lesser extent), from 0.78% to 0.82%. Australian 10-year yields similarly rose from 1.09% to 1.13%. Markets are pricing 13 basis points of easing at the 1 October RBA meeting, and a terminal rate of 0.54% (RBA cash rate currently at 1.00%).

Foreign Exchange: The US dollar index is up modestly on the day. EUR/USD fell from 1.1070 to 1.1015. USD/JPY rose only slightly, from 108.15 to a two-month high of 108.44, the defensive yen performing well amid the US equities decline. AUD/USD fell from 0.6858 to 0.6812 in response to the Fed, while the underperforming NZD fell from 0.6345 to a two-week low of 0.6300. AUD/NZD ranged sideways between 1.0785 and 1.0815.

Commodities: Oil prices fell further amid more indications Saudi production would be restored in time. Iron-ore fell 0.5% to US$97 and gold rose 0.5% to US$1494 an ounce.

Australia: The Westpac-Melbourne Institute leading index fell 0.28% in August after rising 0.15% in July. The six-month annualised growth rate fell to
-0.35%, indicating below trend economic growth. The index has now been in negative territory for the 8th time in 9 months following July’s 0.01% reading. The major components of the fall were equities and commodities and dwelling approvals.

New Zealand: The current account deficit narrowed in the June 2019 quarter, boosted by goods export values. The current account deficit stood at 3.4% of GDP compared with 3.6% in March. There was an increase in export values, as a rise in prices offset a decline in volumes. The surplus in the service sector balance edged lower as exports fell slightly and imports nudged higher.

United States: The FOMC cut the Federal funds rate by 25 basis points to a 1.75%-2.00% range, as was widely expected. It is the second rate cut this year. The FOMC also cut the interest rate on excess reserves by 30 basis points. The statement reiterated that the Fed will "act as appropriate to sustain the expansion” and offered no strong guidance about further rate cuts.

Members were widely dispersed in their expectations with the dot-plot revealing five members expected a 25bp hike by year’s end and seven members expected a cut. Five members (the median expectation) expected an unchanged rate.

Officially three members dissented – hawks George and Rosengren wanted an on-hold decision while dove Bullard wanted a 50 basis point cut. The median expectation for the Fed rate in 2020 is for no change, then a hike in 2021 and another in 2022 and in the long run remaining at 2.50%.

Fed Chair Powell at the press conference articulated a “wait and see” approach, shying away from characterising the cut as an insurance one, saying the Fed will be flexible in dealing with the numerous uncertainties present.

Earlier, data showed that housing starts jumped 12.3% in August, after a fall of 1.5% in July.

Today’s key data and events:

NZ GDP Q2 exp 0.4% prev 0.6% (8.45am)

AU Labour Force Aug (11:30am)

- Employment Change exp 7k prev 41.1k

- Unemployment Rate exp 5.3% prev 5.2%

- Participation Rate exp exp 66.1% prev 66.1%

UK Retail Sales Aug exp 0% prev 0.2% (6:30pm)

EZ OECD Publishes Interim Economic Outlook (7pm)

UK Bank of England Rate Decision exp 0.75% prev 0.75% (9pm)

US Current Account Bal. Q2 exp -127.4bn prev -130.4bn (10:30pm)

US Initial Jobless Claims w/e Sep 14 exp 214k prev 204k (10:30pm)

US Philly Fed Business Outlook Sep exp 10.5 prev 16.8 (10:30pm)

US Leading Index Aug exp -0.1% prev 0.5% (12am)

US Existing Home Sales Aug exp -0.7% prev 2.5% (12am)


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