Bank of Melbourne

Morning Report

Main Themes: A gauge measuring the performance of the US services sector performed worse than expected, adding to concerns over economic growth prospects. Markets boosted their expectations for further cuts to the Fed funds rate, sending US equity benchmarks higher, while bond yields and the US dollar fell.

Main Themes: A gauge measuring the performance of the US services sector performed worse than expected, adding to concerns over economic growth prospects. Markets boosted their expectations for further cuts to the Fed funds rate, sending US equity benchmarks higher, while bond yields and the US dollar fell.

Share Markets: Equity markets in the US ended a tumultuous session higher. Markets turned sharply lower following the release of economic data that showed a drop in service sector confidence, but that was soon reversed as expectations for a more dovish Fed mounted. The S&P 500 closed up 0.8% and the Dow Jones was 0.5% higher. Gains were relatively broad based across sectors, although financial stocks were little changed.

Interest Rates: Bond yields fell as poor economic data heightened market expectations for more Fed easing. The US 2-year yield fell for the 6th consecutive session, down 9 basis points to 1.39% and the 10-year lost 6 basis points to 1.53%. Futures pricing for a cut at the October FOMC meeting has risen from around a 40% probability at the end of last week to 85% as of this morning. More dovish comments from two more Fed board members overnight have also boosted expectations.

Australian interest rates fell. The 10-year bond yield was 4 basis points lower to 0.92% and the 3-year bond currently has a yield of about 0.61%.

Foreign Exchange: The US dollar index fell for the third straight session, ending 0.1% lower. Against the yen it is now around a 4-week low and is at the lowest in one week against the euro. A trend of lower US economic data this week has weighed on the US dollar amid increasing speculation that the Fed will act to lower rates further this year.

The pound rose slightly overnight, as investors speculated that Boris Johnson may have a “Plan B” if his Brexit deal is rejected. Reports suggest that he hasn’t ruled out keeping the Irish backstop (the free movement of goods between Northern Ireland and Ireland) on the condition that the EU puts a clear time limit on it.

The Australian dollar held onto yesterday’s gains against the US dollar and is currently around 67.42 US cents.

Commodities: Oil prices were down overnight as concerns over economic growth mounted and Saudi Arabia announced that it had restored full oil output following last month’s attacks. WTI fell US$0.3 per barrel to US$52.4. Gold rose amid safe-haven buying to US$1,505 per ounce.

Australia: Australia recorded a $5.9bn trade surplus in August, down from the $7.3bn surplus registered in July and the record $7.9bn surplus in June. There was a decline in imports over the month as Australians bought less consumption and capital goods from the rest of the world. A falling Australian dollar has pushed up the prices of imports while waning domestic demand has also weighed.

Against the backdrop of surging iron ore prices due to supply disruptions in Brazil, and an increase in infrastructure spending from China, exports have been elevated. As commodity prices have pulled back from recent highs, exports have moderated somewhat, but remain at a historically high level. Exports declined 3.4% in August, but were still 10% higher than a year ago.

We expect the trade surplus to continue narrowing over the coming months, reflecting the trend lower in commodity prices.

Europe: Final business survey readings for the Eurozone showed confidence stalling across the bloc. The composite purchasing manager’s index (PMI) fell to 50.1 in September from 51.9 in the month before. The slowdown adds to fears of contagion from the long-running sluggishness in manufacturing into the services sector.

United Kingdom: PMI data showed the UK services sector falling into contractionary territory in September. The IHS Markit/CIPS services sector PMI fell to a six month low of 49.5 ahead of the looming October 31 Brexit deadline, as firms braced for the prospect of a tumultuous period.

United States: Further signs of waning US economic growth emerged overnight. The ISM non-manufacturing business survey fell to 52.6 in September, the lowest since August 2016. More detail in the report showed that businesses are increasingly concerned about the prospect of tariffs beginning to affect consumer demand. Elsewhere in the survey, firms reported the lowest level of hiring intentions since 2014, adding to concerns over weakening in the labour market. Non-farm payrolls data will be released tonight and will be closely watched for signs of a turnaround in hiring, which has been a bright spot of the economy over the last year. If the labour market begins to sour, it will add even more expectations for more aggressive monetary easing from the Fed.

Other data released overnight showed US factory orders contracted 0.1% in August while durable goods orders rose 0.2%. Both readings were broadly as expected.

Speaking in Madrid, Chicago Fed President Charles Evans said that he was “extremely open minded” about making an adjustment to policy depending on how economic data played out. Following the drop in service sector confidence, Dallas Fed President Robert Kaplan cautioned against reading too much into a single data point, but reiterated that he was also open minded and watching services and consumption data closely for signs that tariffs were beginning to affect consumer spending and the labour market. Markets have taken these comments to mean that the slew of weak data recently is likely to result in further policy easing at the October FOMC meeting.


Today’s key data and events:

US Fed’s Clarida Speaks in New York (8.35am)

AU RBA Financial Stability Review (11.30am)

AU Retail Sales Aug exp 1.0% prev -0.1% (11.30am)

AU RBA Assistant Gov. Ellis Speaks (1.20pm)

US Non-Farm Payrolls Sep exp 148k prev 130k (10.30pm)

US Unemployment Rate Sep exp 3.7% prev 3.7% (10.30pm)

US Trade Balance Aug exp -$54.5bn prev -$54.0bn (10.30pm)

US Fed’s Rosengren Speaks (10:30pm)

US Fed’s Bostic Speaks (12.25am)

US Fed Chairman Powell Speaks (4am)


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