Bank of Melbourne

Morning Report

Main Themes: Markets were relatively quiet overnight. Federal Reserve officials signalled that they are ready to do more to calm short term interest rate markets, if necessary. Poor business confidence data out of Europe left European markets down.
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Main Themes: Markets were relatively quiet overnight. Federal Reserve officials signalled that they are ready to do more to calm short term interest rate markets, if necessary. Poor business confidence data out of Europe left European markets down.

Share Markets: On low volume and little major news flow, US share markets ticked up slightly. Investors took stock of positive US manufacturing data, which was largely as expected, and more assurance that Fed officials are prepared to take further action, if needed. The Dow Jones nudged up 15 points (or 0.1%) but the S&P 500 was 0.3 points weaker (or -0.01%). Shares in Apple rose after US trade regulators approved some of its tariff exemption requests.

Poor economic data out Europe caused heavy losses on European exchanges. The Eurostoxx 50 fell 1% while the DAX closed 1% lower.

Interest Rates:  Yields on european and US bonds fell overnight amid worse-than-expected business confidence surveys throughout the bloc. German 10 year bond yields shed 6 basis points to -0.58%.

US bond yields were lower across the curve. The 10-year treasury lost 4 basis points to 1.71%, as did the 2-year yield, down to 1.68%. The tighter yields came despite continued large issuance of US treasuries this week. The US treasury will sell $113 billion in shorter-dated notes this week.

A tentative calm restored to short-term interest rates. Repo rates traded within the Fed’s target band after spiking last week, forcing the Fed to intervene and implement a 3 week long liquidity operation to calm volatility.

The Australian 10-year bond yield fell 2 basis points to 1.00% and the 3-year was 1 basis point lower at 0.73%.

Foreign Exchange: The US dollar inched higher against most currencies as funds drifted towards safe havens. The euro lost 0.2% against the US dollar after weak PMI data raised concerns over the economic health of the euro zone, less than 2 weeks after the ECB pledged more quantitative easing. The US dollar trended gently upward for most of the session, ending 0.1% higher against its major peers. The Australian dollar was range-bound, and remained relatively unchanged this morning at 67.72 US cents.

Commodities: Oil prices rose as traders scrutinised conflicting reports on how quickly Saudi Arabia will be able to restore its lost output. WTI is trading at around US$58.7 per barrel.  Gold prices continued their advance, ending the session up US$5.3 per ounce to US$1,522.1.

Australia: No major data to report.

Europe: Business confidence surveys showed companies in two large European countries faced a deterioration in activity in September. The Markit PMI for the German private sector (which tracks both manufacturing and services companies) fell below 50 into contraction for the first time since April 2013. Manufacturing activity was particularly weak, reflecting concerns over US-China trade tensions and Brexit. The French Markit PMI also slowed unexpectedly, and the composite measure of the euro zone dropped to 50.4 from 51.9 in August.

United States: There was another reasonable print of economic data out the US last night, offering further hope of resilience amid a global growth downturn. The IHS Markit manufacturing index edged up to 51 in September, slightly better than market expectations and August’s outturn.

New York Fed president John Williams acknowledged the turbulence in the US repo market that his branch is responsible for. Speaking at a US treasury market conference, he re-emphasised that officials would “continue to monitor and analyse developments closely”.

Today’s key data and events:

JN Jibun Bank Manufacturing PMI Sep prev 49.3 (10:30am)

JN Leading Index CI Jul prev 93.6 (3:00pm)

EZ German IFO Business Climate Sep exp 94.5 prev 94.3 (6pm)

UK Public Sector Net Borrowing Sep exp 6.5bn prev -2bn (6:30pm)

AU RBA Governor Lowe Speaks in Armidale (8:05pm)

US FHFA House Price Index Jul exp 0.3% prev 0.2% (11pm)

US Richmond Fed Manufacturing Index Sep exp 1 prev 1 (12am)

US CB Consumer Confidence Sep exp 133.0 prev 135.1 (12am)

EZ ECB Vice President Guindos Speaks in Frankfurt (12:30am)

 

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