Bank of Melbourne

Morning Report

Main Themes: Markets were mixed overnight with little direction. Investors resumed focus on trade negotiations and digested a swathe of global central bank decisions.

Main Themes: Markets were mixed overnight with little direction. Investors resumed focus on trade negotiations and digested a swathe of global central bank decisions.

Share Markets: US share markets lacked direction overnight. The Dow Jones ended its session 0.2% lower after spending much of the night in positive territory while the S&P500 was unchanged, still just 1% off its record high. Health care stocks outperformed, as did materials and real estate shares following better than expected US existing home sales. European bourses closed mostly higher, led by gains in financial stocks.

Interest Rates: US treasury yields traded sideways, with the 10-year yield at 1.79% and the 2-year settling at 1.74. The yield curve has flattened slightly since the Fed cut rates on Thursday morning. The spread between the 10 and 2 year has narrowed from 7 basis points before the decision to 5 basis points this morning. The flatter curve is a sign that the markets feel the Fed is being too hawkish in the face of a deteriorating economic outlook. The NY Fed once again committed funds to stabilising the repurchasing agreement market as borrowing costs spiked again. It pledged up to $75 billion to keep the Federal funds rate within its target band.

The Australian 10-year government bond yield fell 8 basis points to 1.06% ahead of October’s looming rate decision. Financial markets are now currently pricing in an 81.6% chance of a rate cut in October’s meeting.

Foreign Exchange: The US dollar index fell, as several central banks decided not to ease policy in the wake of the Fed’s cut. The Swiss National Bank, the Bank of England and the Bank of Japan all kept their key rates on hold overnight. Norway’s central bank increased its key policy rate while Indonesia’s cut rates. They key theme among most of the decisions was that policymakers stand ready to ease policy if needed.

The pound received a late boost when Juncker suggested the EU and Britain could have a deal if the Irish border backstop (which the British government wants removed), could be replaced with an alternative.

The Australian dollar was one of the worst performing currencies against the US dollar overnight, falling along with bond yields below 68 US cents to 67.94 cents.

Commodities: Oil prices lifted as a storm disrupted supply in Texas while safe-haven gold also edged up near US$1,500 per ounce.

Australia: Labour market data is continuing to provide a mixed picture. From one perspective, jobs growth remains extremely robust. In August, employment grew 34.7k in August and job gains have averaged 26.4k per month over 2019 so far. This pace of jobs growth would have been sufficient to bring the unemployment rate down if the participation rate held steady.

The participation rate, however, has not held steady, and has continued to trend higher. The participation rate rose to another new record high of 66.2% in August, and is 0.4 percentage points higher than the beginning of this year.

Looking at the data from a different perspective, strong population growth, growing workforce participation and an upward trending unemployment rate is pointing to spare capacity not only persisting, but gradually increasing in the labour market. The unemployment rate edged higher, from 5.2% in July to 5.3% in August, the highest in a year.

Job creation was centred in the two largest States in August. NSW recorded another solid month (16.7k) while Victoria burst back to life with a 20.3k increase. There was a net decline in employment in QLD (-7.2k) and a minor fall of 0.1k recorded in Tasmania. Jobs growth was modest in SA (1.4k) and WA (3.6k).

Meanwhile, the budget returned to be broadly balanced in the 2018/19 financial year. Federal Treasurer Frydenberg said the deficit stood at $0.7bn, or 0.0% of GDP. This is an improvement from a deficit of $10.1bn (-0.5% of GDP) in 2017/18.

The result exceeded expectations and was the first balance/surplus since 2007/08. The result was due to the combination of higher revenue through strong commodity price growth over the year and lower payments.

New Zealand: GDP growth expanded 0.5% in the June quarter. Annual growth slowed from 2.5% in the March quarter to a 5½-year low of 2.1%. Another rate cut before the end of this year remains on the cards.

United States: US economic data released overnight was overall positive. Sales of previously owned homes rose 1.3% in August, the fastest pace since March 2018. Labour market data continued to surprise with its robustness. Fewer Americans are signing up for unemployment benefits, according to the initial jobless claims survey, which showed claims at 208,000 in the week ending 15 September. The Philadelphia Fed business outlook index fell to 12 in September from 16.8 in August, but was above the consensus estimate of 10.5.

US-China trade talks resumed. The chief White House economic aid said in a television interview that “…there’s a little softening in the air”. Deputies from both sides are meeting now ahead of higher-level talks next month.

Global: The OECD cut its 2019 world growth forecast to 2.9% from 3.2% in May. It said that intensifying trade conflict was taking a toll on business confidence and that financial market risks are mounting. In a statement, the organisation called for greater cohesiveness between fiscal and monetary policy in the euro area in order to boost growth and reduce distortions. The downgrades were largest for the US and Germany. Australia is expected to grow 1.7% this year. 

Today’s key data and events:

NZ Credit Card Spending Aug -1.8% (1pm)

JN CPI Aug y/y exp 0.3% prev 0.5% (9:30am)

JN Dept Store Sales Aug y/y prev -2.9% (3:30pm)

US Federal Reserve’s Williams Speech (10:15pm)


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