Bank of Melbourne

Morning Report

Main Themes: Markets were hopeful ahead of US and China trade talks scheduled for today. US share and bond yields were higher. That said, Turkish airstrikes in Syria are adding to geopolitical risks may dampen risk appetite into the Asian session.

Main Themes: Markets were hopeful ahead of US and China trade talks scheduled for today. US share and bond yields were higher. That said, Turkish airstrikes in Syria are adding to geopolitical risks may dampen risk appetite into the Asian session.

Share Markets: US shares edged higher, suggesting optimism over the upcoming trade talks between the US and China. Investors were hopeful after comments that China was open to a partial deal. Gains were pared later on optimism faded. The Dow closed 0.7% higher, while the S&P500 lifted 0.9%.

Interest Rates: The lift in sentiment extended to bonds. Yields on US treasuries lifted – 10-year yields rose 5 basis points to 1.59%. The optimism over trade talks and auctions adding to supply were supportive of yields. There was minimal reaction to the Federal Reserve’s minutes.

Foreign Exchange: The US dollar index was little changed, although the US dollar rose against the yen on trade deal hopes. Sterling was volatile, but is continuing to hold onto yesterday’s losses after it appeared unlikely that a Brexit deal could be reached. The Australian dollar was mostly higher, tracking stronger risk appetite in other asset markets. AUD however, lost its gains early this morning, probably reflecting geopolitical concerns.

Commodities: Oil prices were relatively unchanged. The Turkey-led attack on Syria which could dent supply was offset by a build in US crude inventories.

Global: China and US trade talks are due to start today. Chinese officials have said that it is open to reaching a partial trade deal with the US, as long as no tariffs are added, but aren’t optimistic about securing a broad agreement in the short-term, particularly in the wake of the US blacklisting Chinese tech companies.

Australia: Consumers ratcheted up concerns about the outlook for the economy and remained downbeat about their family finances in October. The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.5% to 92.8, the lowest since July 2015.

All index components recorded material declines in October. Consumer expectations for the economy recorded the biggest falls – the ‘economy, next 5 years’ sub-index plunged 9.1% and the ‘economy, next 12 months’ sub-index dropped by 6%. October marks the first month both sub-indexes have been below their long run average levels since April 2016.

The index remained below the 100 level, indicating that pessimists outnumber optimists. It has been in this range for 3 of the last 4 months. The decline comes even as the RBA cut rates to a new historic low of 0.75% at its October meeting. Consumers appear to be looking through the cuts themselves and into the reason for the looser monetary policy.

United Kingdom: Ahead of the Brexit deadline on October 31, the UK and EU appear no closer to an agreement. The European Union said that it  was open to a deal but that it could not accept the recent UK proposal.

United States: The minutes of the FOMC meeting on September 17-18 revealed support of “most” participants to the reduction of the Fed funds target range of 25 basis points, but there was more division over the outlook. “Several” participants thought that the Federal Reserve should cut rates further in response to the risks linked to the trade tensions, slowing global growth and other political risks. However, “several” participants, while acknowledging the key uncertainties were “unlikely to be resolved soon”, they did not think that “these uncertainties would derail the expansion” and that “they did not see further policy accommodation as needed at this time”. Note that the minutes preceded last week’s economic data which pointed to a worrying deterioration in manufacturing conditions. Services activity and employment have also slowed, but to a lesser extent. The data may have swung the favour towards more support for further monetary easing.



Today’s key data and events:

JN Machinery Orders Aug exp -1.0% prev -6.6% (10.50am)

AU Housing Finance (ex refi) Aug (11.30am)

   No. Owner Occupier exp 2.5% prev 4.2%

   Value Investor exp 3.0% prev 4.7%

   Value Owner Occupier 3.0% prev 5.3%

UK Industrial Production Aug exp 0.1% prev 0.1% (7.30pm)

EZ ECB Accounts of Policy Meeting Sep (10.30pm)

US Consumer Price Index Sep exp 0.1% prev 0.1% (11.30pm)

US Initial Jobless Claims w/e Oct 5 exp 220k prev 219k (11.30pm)

US Fed’s Bullard Speaks in Washington (6.00am)

US Fed’s Daly Speaks in San Diego (6.30am)


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.


Janu Chan, Senior Economist  Ph: 02-8253-0898