Bank of Melbourne

Morning Report

Main Themes: A sense of restrained optimism pervaded the air overnight amid positive sentiment around a possible Brexit deal and reports of progress in US-China trade talks.
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Main Themes: A sense of restrained optimism pervaded the air overnight amid positive sentiment around a possible Brexit deal and reports of progress in US-China trade talks.

Share Markets: US share markets rose for the second session in a row as trade talks continued between the US and China. The Dow Jones and the S&P500 both closed 0.6% higher.

The Euro Stoxx 50 and the FTSE 100 also gained as a positive meeting between the UK and Irish leaders increased hopes of a Brexit deal before the October 31 deadline.

Interest Rates: The US yield curve steepened as investors turned cautiously positive about a thawing in the US-China trade dispute. US 10-year treasuries saw an 8 basis point increase in their yield to 1.67% while the 2-year rose 7 basis points to 1.55%. At the shorter end of the curve, the yield on the 3-month treasury bill fell 2 basis points as US consumer prices added to further weight to the case for more cuts to the fed funds rate.

Australian bond yields were broadly flat, with no change to shorter term rates and a 1 basis point increase in the 10-year bond yield to 0.90%.

Foreign Exchange: The pound rallied as some of the pessimism around the likelihood of a Brexit deal lifted. Comments from Irish premier Leo Varadkar suggesting that a Brexit deal is possible before the October 31 deadline sent the pound on its way to a 1.9% increase over the session to US$1.244, its largest daily increase in 7 months.

The US dollar fell against most of its peers as optimism about global developments promoted a risk-on move.

The Australian dollar was somewhat volatile, but trended higher over the session. The AUD is currently around 67.62 US cents this morning.

Commodities: Oil prices received a boost from comments from OPEC, who took a line from the outgoing ECB president’s song sheet by pledging to do “whatever it takes” to prevent another slump. A top official said that the US-China trade war was casting a shadow over the market and that failure to reach a deal would be “catastrophic”. He also added that he was cautiously optimistic about an agreement being reached. Oil prices rose in the order of 2%, with WTI up US$0.9 per barrel to US$53.6.

Gold prices fell below US$1,500 per ounce as investors turned away from safe haven assets.

Australia: Home lending for both owner occupiers and investors, lifted in August for the third consecutive month. It adds further to evidence that the housing market is staging a recovery. It was investors which stole the show. The value of investor lending (excluding refinancing) was particularly strong, up 5.7% in August. It was the strongest increase in investor lending since September 2016. It suggests that investors are once again playing a key role in the current recovery in dwelling prices. The number of owner-occupier loans (excluding refinancing) rose 0.7% in August, the fourth consecutive month of increase. The annual rate of decline eased from 8.4% in July to 5.1% in August, the best result since June 2018. First home buyers as a proportion of owner-occupier loans, edged higher in August, rising from 19.5% in July to 19.6% in August.  Despite recent price increases, affordability has improved for first home buyers as prices are still well below their peaks and interest rates have fallen.

Japan: Machinery orders fell 2.4% in August following a 6.6% decline in July. The back-to-back decline indicates caution among firms in regards to the global environment is flowing through to investment spending. Meanwhile, the country is preparing for Typhoon Hagibis which is expected to make landfall around Tokyo tomorrow. The storm has prompted several airlines to cancel flights.

United Kingdom: UK prime minister Boris Johnson and Ireland premier Leo Varadkar surprised markets by emerging from their meeting in an upbeat mood. Leo Varadkar said he believed it was possible to reach a deal by the end of the month which would see the UK leave the European Union in an orderly fashion. Neither leader provided any further detail about nature of the pathway to a deal, however issues around the Irish border have been at the centre of the UK-EU impasse.

United States: US-China continued talks overnight, and sent positive signals that an agreement may be reached on some peripheral issues. Among the bright spots in talks were issues such as currencies and copyright protections. US president Donald Trump sent a somewhat cryptic tweet confirming that talks were set to continue “Big day of negotiations with China. They want to make a deal, but do I?” Markets are hopeful that progress on smaller issues could lead to some tariff concessions, however there are no signs that either side is willing to budge on the key issues of technology protection and subsides for Chinese state-owned enterprises.

The positive sentiment around trade talks overshadowed another weak outturn in US consumer prices. CPI rose less than expected in September as the price of used cars dropped. The core measure rose 0.1% over the month compared with market expectations of a 0.2% rise. Headline inflation was 1.7% year-on-year. Separate data on the labour market was better than expected. Weekly jobless claims dropped to 210,000 last week, below expectations of 220,000.

 

 

Today’s key data and events:

NZ BusinessNZ Mfg PMI Sep prev 48.4 (8.30am)

EZ German CPI Sep final exp 0.0% prev 0.0% (5pm)

US Import Price Index Sep exp 0.0% prev -0.5% (11.30pm)

US UoM Consumer Sentiment Oct exp 92.0 prev 93.2 (1am)

US Fed’s Mesters (8.30am), Bostic (9.30am), Kashkari (11pm), Rosengren (4.15am) and Kaplan (6am) Speaks

 

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