Bank of Melbourne

Morning Report

Main Themes: Worries turned to the economy overnight, which were focused on a fall in the US ISM manufacturing index to a ten-year low. US shares and bond yields were down. The Australian dollar fell after the RBA decision to lower official interest rates yesterday.

Main Themes: Worries turned to the economy overnight, which were focused on a fall in the US ISM manufacturing index to a ten-year low. US shares and bond yields were down. The Australian dollar fell after the RBA decision to lower official interest rates yesterday.

Share Markets: US shares slumped as investors worried that the downturn in the economy was intensifying.  The Dow fell 1.3%, and the S&P500 dropped 1.2%.

Interest Rates: Yields on US treasuries fell after the manufacturing data release – US 10 year yields dropped 3 basis points to 1.64%.  

Foreign Exchange: The US dollar index also dropped after the weak manufacturing data, and further extended its slide. Shortly after the data release, US President Trump tweeted that “… Powell and the Federal Reserve have allowed the Dollar to get so strong” and “that our manufacturers are being negatively affected”. GBP weakened back to a one-month low against the US dollar on doubts that Boris Johnson can get the EU to agree to an amended Brexit deal. The Australian dollar fell to 67.0 US cents after the RBA’s decision to lower official interest rates yesterday, and held around that level overnight.

Commodities: Oil prices and the broader commodity price index fell as weak US economic data lifted concerns about demand. Gold prices rose on safe-haven buying.

Australia: Yesterday, the Reserve Bank (RBA) lowered the official cash rate by 25 basis points to a new record low of 0.75%. A range of factors have supported the decision to lower official interest rates. Economic growth is running below trend and is at its slowest pace since 2009. Underlying inflation has held below the RBA’s 2 to 3% target band for 3½ years. While there has been strong growth in employment, the unemployment rate has been propped up by a record high workforce participation, and is preventing prospects for wage growth to pick up from its slow pace. Adding to these domestic factors, the international environment has been increasingly uncertain. As trade tensions have persisted and dented investment intentions and trade flows for businesses, major central banks around the world have lowered interest rates. The RBA specifically noted that lower global interest rates was taken into account in today’s decision. The RBA is clearly hoping for an improvement in economic activity, but both domestic and international developments are frustrating the progress towards the RBA’s aims. Without these further signs of improvement it would seem likely that the RBA would provide further monetary policy support. We are expecting another rate cut early next year, in February, to 0.50%.

RBA Governor Lowe also spoke last night in Melbourne. Lowe spoke of low appetite to invest relative to appetite to savings as a reason behind low interest rates globally, and that addressing the issue was a task for governments and businesses. Lowe also emphasised that while there were “undesirable side effects from low interest rates” monetary policy “still works” and supported employment, jobs and income growth.

A recovery appears to be in place for house prices. For the third month in a row, CoreLogic dwelling prices across 8-capital cities lifted. In September they rose 1.1%, which was the strongest monthly gain since 2017. The increase in September was again driven by dwelling prices in Sydney and Melbourne, where prices rose 1.7% in both cities. Expectations of further interest rate cuts would provide further support to housing demand. However, any recovery in prices is likely to be more muted than the previous upswing in prices. Soft wage growth and high household debt are likely to restrain the recovery.

Despite the improvement in dwelling prices, residential construction is set to remain weak. Building approvals fell 1.1% in August, and have fallen for three consecutive months. The weakening trend suggests that the downturn in residential construction has further to run. The number of approvals was the lowest since January 2013, and down 44% from its peak in November 2017.

The AiG performance of manufacturing index improved from 53.1 in August to 54.7 in September, defying the global trend of weakening activity and confidence. The index has fallen below 50 only once this year in June, and is continuing to suggest an expansion. The strongest sector was in food & beverages, but there was also a resurgence in machinery & equipment reflecting stronger demand from mining and defence sectors.

Japan: Weaker confidence in the Tankan survey further added to the soft global outlook for manufacturing. The large manufacturers index fell from 7 in Q2 to 5 in Q3, while Investment plans were scaled back.

Europe: Inflation eased from an annual rate of 1.0% to 0.9% in the year to September, edging further away from the 2% goal of the ECB.

The Markit manufacturing PMI was revised upwards from 45.6 to 45.7 in the final estimate for September, but also indicated weakness.

United Kingdom: The Markit manufacturing PMI rose from 47.4 in August to 48.3 in September, but has held below 50 for five consecutive months. Markit reported that the domestic market was particularly weak, although foreign demand was hurt by Brexit uncertainty as supply chains were diverted from the UK.

United States: The ISM manufacturing index fell further into contraction territory, from 49.1 in August to 47.8 in September. The index has slid for six months straight, and September’s reading was the lowest since 2009, indicating that the sector is increasingly struggling. A drop in the exports sub-index suggest that the trade tensions and weak global growth are weighing on the sector.

The Markit manufacturing index was not as downbeat however, which was revised up from 51.0 to 51.1 in the final estimate for September. While this index remains in expansion territory, it is also indicating a slowdown, although not the same rate of deterioration as the ISM survey is suggesting.

Chicago Fed president Evans hinted at supporting a pause in Fed rate cuts, saying that the situation called for “50 or 75 basis point cut” below neutral and even noted a scenario in which the Fed funds rate would increase.



Today’s key data and events:

US ADP Employment Change Sep exp 140k prev 195k (10.15pm)

US Fed’s Barkin (10pm), Harker (11pm) and Williams (12.50am) speak


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