Main Themes: Extraordinary political developments overnight dominated, keeping markets risk averse. Talk of impeachment of US President Trump weighed on risk appetites. US shares, bond yields and the US dollar fell. In the UK, the Supreme Court ruled that Johnson’s suspension of parliament was unlawful. The Australian dollar however, gained after Lowe’s comments last night were less dovish-than-expected.
Share Markets: US shares began the session in the black, but sentiment weakened on talk that Democrats were pushing for an inquiry to impeach US President Donald Trump. The Dow fell 0.5%, while the S&P500 dropped 0.8%.
Interest Rates: The escalation in risk aversion and weak US consumer confidence data was supportive of bonds, and saw yields fall. US 10-year yields dropped 8 basis points to 1.65%.
Foreign Exchange: The US dollar index weakened on the talk of an impeachment inquiry against President Trump and on the weak consumer confidence data. Sterling gained after the Supreme Court ruled that Boris Johnson’s call to suspend Parliament was unlawful. The Australian dollar lifted after the RBA Governor Lowe’s speech last night, suggesting markets were prepared for a more explicit signal for another reduction in the cash rate. The AUD lifted from 67.8 US cents to trade within the range of 67.9-68.1 US cents just after Lowe’s speech.
Commodities: Oil prices fell sharply, erasing most of the gain since the attack on Saudi’s oil facilities, reflecting ongoing concerns over global demand. Gold prices rose on the elevated risk aversion.
Australia: In a speech last night, RBA Governor Lowe stopped short of directly signalling that the RBA board would consider lowering interest rates at its next meeting in October, but still left the option open. “At our board meeting next week, we will again take stock of the evidence. The board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, make further progress towards full employment, and achieve the inflation target over time”. The RBA remained of the view that the economy was at a “gentle turning point” and that growth will pick up. However, the language was increasingly uncertain. “The strength and durability of this pick-up remains to be seen”. Lowe also said that the RBA could not overlook the global shift towards monetary easing and that “further monetary easing may well be required”. This sense of caution suggests no reason to shift our expectation that the RBA will lower official interest rates when it meets in October.
Japan: Business confidence crept backwards in Japan, according to survey data released by Jibun Bank and IHS Markit. Flash data for September showed manufacturing confidence down 0.4 points to 48.9 and the index for service sector companies 0.5 points lower at 52.8. The latest data suggest that Japan’s manufacturing has been affected by an uncertain global outlook, fuelled by US-China trade tensions. The manufacturing index fell to its lowest in 7 months. The service sector remains a bright spot, but there are concerns that the increase of the sales tax due on October 1 will dent growth in the sector.
Separate data from the Cabinet Office showed a slight lift in the leading index to 93.7 in July.
Europe: The IFO business survey pointed to a marginal improvement in confidence. The business climate index edged up from 94.3 in August to 94.6 in July, but remains close to a seven-year low. Moreover, the expectations index weakened further, which signals that confidence about the outlook remains low, and suggests that manufacturing activity in Germany is continuing to struggle.
United Kingdom: The Supreme Court has ruled that Boris Johnson’s decision to suspend Parliament for five weeks was unlawful, because it had the effect of “frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification”. Parliament is due to reconvene today as a result. The ruling sparked calls from the opposition for Boris Johnson to resign. While the UK is no closer to resolving the issues surrounding Brexit, the move could be seen as lessening the chance of a hard Brexit, which Johnson refused to rule out.
United States: This morning, House Speaker, Nancy Pelosi announced that the US House of Representatives will launch a formal inquiry into whether President Trump should be impeached.
The Richmond manufacturing index slumped back to -9 in September, after temporarily spiking to 1 in October. It was the second negative reading in three months. The regional survey provides an early indication that the manufacturing sector in the US is still weak over September.
Consumer confidence fell from 134.2 in August to 125.1 in September. The index remains high by historical standards, but it was the biggest fall in nine months. So far, the consumer has weathered the uncertainty from the trade tensions to date, as the labour market has continued to show strength. The fall in confidence could suggest an increasing impact from the global uncertainty on the consumer.
Today’s key data and events:
NZ Trade Balance Aug exp –$1,400mn prev -$685mn (8:45am)
AU ABS Skilled Vacancies Aug prev 0.4% (11:00am)
NZ RBNZ OCR Decision exp 1% prev 1% (12:00pm)
US Chicago Fed President Evans Speech (10:00pm)
US New Home Sales Aug exp 3.3% prev -12.8% (12:00am)
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.
Janu Chan, Senior Economist Ph: 02-8253-0898