Bank of Melbourne

Morning Report

Main Themes: Attention shifted from impeachment proceedings on Trump back to trade. On this front, developments were mostly positive following a deal between the US and Japan, and comments suggesting a deal with China could be sooner than people think. The recovery in risk appetite boosted shares, and bond yields. The US dollar is higher.
Share

Main Themes: Attention shifted from impeachment proceedings on Trump back to trade. On this front, developments were mostly positive following a deal between the US and Japan, and comments suggesting a deal with China could be sooner than people think. The recovery in risk appetite boosted shares, and bond yields. The US dollar is higher.

Share Markets: The Dow and S&P500 both closed 0.6% higher, as risk appetite recovered on the improved rhetoric on trade. The Nasdaq rose 1.1%.

Interest Rates:  The improvement in risk appetite saw US bond yields mostly reverse their falls from yesterday. US 10-year yields rose 9 basis points, back up to 1.74%. Better-than-expected US housing data would have also propped up yields.

Foreign Exchange: The US dollar was the major winner out of last night’s events, as investors shrugged off the political uncertainty with impeachment talk, and focussed on positive talk on trade. GBP dropped sharply, as investors realised that Brexit uncertainty was here to stay, despite the recent Supreme Court ruling against Boris Johnson’s suspension of parliament. The Australian dollar fell from 68 US cents yesterday, sliding to 67.5 US cents this morning, weighed down by the US dollar gains.

Commodities: Oil prices fell on an unexpected build in US inventories. There was also a report that Saudi’s Aramco has partially restored its oil production faster than expected, and that output would be fully back on line by the end of September.

Australia: Skilled vacancies edged down 0.1% in August following a 0.1% fall in July, according to data by the Department of Employment and Workplace Relations (DEWR). Vacancies have been in a trend decline for eight months straight, and add to a range of indicators pointing to a weakening in the labour market.

Japan: Bank of Japan (BOJ) board member, Takako Masai, said that the central bank would ease policy further, if momentum towards the BOJ’s inflation target of 2% was lost. The concern stemmed from the “significant downside risks concerning overseas economies” and the negative impact on prices.

New Zealand: The Reserve Bank of New Zealand (RBNZ) left official interest rates unchanged at 1.00% as widely expected. It followed a surprise move to lower official interest rates by 50 basis points at its last meeting in July. The accompanying press release did not provide an explicit signal that the central bank would ease rates again anytime soon. Judging by the reaction in the kiwi, markets were looking for a clearer signal. Moreover, the Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook. However, an easing bias remains intact, with the RBNZ noting that “there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives”.

The trade deficit widened from $700 million in July to $1.6 billion in August. The deterioration mostly reflected higher imports including crude oil, aircraft parts and fertilizers.

United States: US President Trump said that a deal with China “could happen sooner than you think”. The comments followed the signing of a trade deal between the US and Japan. While cars were not covered, the biggest source of the US trade deficit with Japan, the deal covered $40 billion worth of digital trade. The next phase of talks were due to start next April. 

New home sales jumped 7.1% in August, more than the 3.8% expected by the median forecast, following an 8.6% decline in August. Looking through recent volatility, home sales appear to be on a mild upward trend. Lower mortgage rates appear to be providing support for the US housing market.

Chicago Federal Reserve President Evans said that the Fed was now “well-positioned” after the two rate cuts delivered by the Federal Reserve this year.  Evans remained optimistic on the US economy, and that while the Fed needed to be “on guard” it did  not need to take any more action against risk that have not materialized.

 

Today’s key data and events:

AU ABS Job Vacancies Aug prev -1.1% (11:30am)

EZ GfK Consumer Confidence Oct exp 9.6 prev 9.7 (4pm)

EZ M3 Money Supply Aug prev 5.2% (6pm)

US GDP Q2 exp 2.0% prev 2.0% (10.30pm)

US Pending Home Sales Aug exp 1.0% prev -2.5% (12.00am)

US Kansas City Fed index Sep prev -4 prev -6 (1.00am)

 

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