Bank of Melbourne

Morning Report

Main Themes: US share markets relinquished early gains and treasury yields fell amid speculation that US-China trade negotiations had stalled after officials cancelled planned visits to US farms. A follow up statement from the Chinese vice agricultural minister over the weekend suggested that the cancellations were unrelated to trade talks.
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Main Themes: US share markets relinquished early gains and treasury yields fell amid speculation that US-China trade negotiations had stalled after officials cancelled planned visits to US farms. A follow up statement from the Chinese vice agricultural minister over the weekend suggested that the cancellations were unrelated to trade talks.

Share Markets: Global stock indices pared early gains following the cancellation of US farm visits by Chinese officials. The Dow Jones finished Friday down 160 points (or 0.6%) and the S&P 500 shed 14.7 points (or 0.5%). Consumer goods and IT stocks suffered the heaviest losses. ASX200 futures are pointing to a flat start for local equities.

Interest Rates: US treasury yields fell as trade optimism took a pause and the Fed announced that it would intervene regularly in the overnight repurchase market until mid-October. Ten-year US treasury yields fell 2 basis points to 1.75% while the 2-year fell 3 basis points to 1.71%.

Australian bond yields followed suit. The 10-year bond yield fell 2 basis points to 1.02% and the 3-year bond yield is currently at 0.74%.

Foreign Exchange: The US dollar index rose on Friday, ending the week higher and snapping a two week losing streak. The US dollar was weaker against other safe-haven currencies though, such as the yen and euro as trade concerns weighed on investors and drove US bond yields lower.

The Australian dollar ended Friday’s session lower as expectations for more monetary easing from the RBA at its October meeting mount. The AUD was last trading at around 67.68 US cents.

Commodities: Oil prices fell on the latest trade developments, but ended the week sharply higher following last weekend’s attacks on Saudi oil facilities. WTI crude fell 0.2% to US$58.09 per barrel. Amid rising geopolitical tensions in the middle-east and heightened economic uncertainty, gold prices recorded another gain on Friday, rising 1.2% to US$1,516.9 per ounce.

Palladium rose to an all-time high of US$1,654.6. A combination of supply issues and speculative buying has pushed prices up almost 30% this year. Palladium is a precious metal used in emissions-reducing catalysts in vehicles. 

Australia: No major data to report.

New Zealand: Credit card spending rose 2.4% in August, according to data released by the Reserve Bank of New Zealand (RBNZ) on Friday. It’s a positive sign for consumption, which has been steady in recent months.

China: The People’s Bank of China (PBOC) cut one of its key policy rates, the 1-year new loan prime rate, by 5 basis points to 4.20%. The move was intended to support activity as the US-China trade war drags on, but is much smaller than the easing undertaken by other major central banks, including the Fed’s recent 0.25% cut. The PBOC has been reluctant to use monetary policy too freely amid rising debt levels. Instead, Beijing has relied on fiscal stimulus through tax cuts and infrastructure spending.

Japan: Inflation data for August showed overall consumer prices rising just 0.3% over the year. Prices excluding fresh food rose 0.5% year-on-year. The result was in line with market expectations and was dragged lower by a drop in energy costs. CPI excluding fresh food and energy rose 0.6% year-on-year, above last year’s average of 0.4%. The Bank of Japan (BOJ) ordered a review to see if global developments could stymie the momentum seen in consumer prices towards its 2% inflation target.

United States: In Washington, US-China trade deputies wrapped up negotiations after two days. Both sides offered perfunctory statements about the meetings being “constructive” and “productive” without providing much further detail. The US removed tariffs from about 400 Chinese goods. Markets were roiled when Chinese officials unexpectedly cancelled planned visits to US farms, but a subsequent statement from Vice Agricultural Minister Han Jun said the cancellations were unrelated to trade talks.

There did not appear to be any further proposals put forward around core issues such as intellectual property or forced technology transfers and in reference to speculation that China would buy more US agricultural products, Trump told reporters on Friday that he would not be satisfied with a partial deal. Higher level talks among each country’s top trade negotiators are scheduled for early October.

The Fed implemented further measures to stabilise the repurchasing market over the weekend. It announced regular operations to be conducted each weekday until October 10. The first will be up to US$75 billion and the rest will be at least that amount. It will also inject liquidity for longer terms on 3 days of the week for at least US$30 billion. Short-term rates have spiked recently above the Fed’s target rate, indicating liquidity issues for some participants. The Fed intervened on an ad-hoc basis last week, with the latest moves designed to shore up confidence among bidders.

Today’s key data and events:

EZ Markit Manufacturing PMI Sep exp 47.5 prev 47.0 (6pm)

US Chicago Fed Nat. Act. Index  Sep exp 0.05 prev -0.36 (10:30pm)

EZ ECB’s Draghi Testifies at European Parliament (11pm)

US Markit Manufacturing PMI Sep exp 50.3 prev 50.3 (11:45pm)

US Markit Services PMI Sep exp 51.5 prev 50.7 (11:45pm)

US Federal Reserve’s Williams Speaks (11:45pm)

US Federal Reserve’s Daly Speaks (1:30am)

US Bullard Discuses Economy and Montery Policy (3am

 

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