Bank of Melbourne

Morning Report

Main Themes: Investors whetted their appetites for risk on Friday, as optimism over trade continued to lift.
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Main Themes: Investors whetted their appetites for risk on Friday, as optimism over trade continued to lift.

Share Markets: US share market bourses ended the week at near record highs on the back of optimism on trade and mostly upbeat earnings reports. The Dow Jones rose 153 points (or +0.6%) and the S&P 500 index lifted by 12 points (or 0.4%).

Interest Rates: US 2-year treasury yields rose from 1.58% to 1.62% and the US 10-year yield increased from 1.76% to 1.79%. Interest-rate markets are pricing 22 basis points of easing at the October 30 meeting and a terminal rate of 1.26%.

Australian 3-year government bond yields rose from 0.71% to 0.75%, closing at 0.72%. The Australian 10-year yield from 1.06% to 1.09%. Markets are pricing 4 basis points of easing at the RBA’s November 5 meeting and a terminal rate of 0.47%.

Commodities: World oil prices lifted modestly in Friday’s trading session. Gold also finished higher.

Australia: There was no major economic data published on Friday domestically.

An article in the Australian Financial Review this morning refers to Australian Treasury warning Federal Treasurer Josh Frydenberg that bank profit margins will be "squeezed" by the Reserve Bank of Australia's ultra-low interest rates and raised the possibility of the RBA offering cheap funding to banks to stimulate the economy. Federal Treasury suggested the RBA could provide cheap debt finance to banks either by buying their bonds or via direct lending. This would compensate for the "intense pressure" on profit margins and ensure lower borrowing costs flowed through to the economy. The advice had been "protected", but was released under Freedom of Information laws.

Eurozone: Germany’s IFO sentiment survey was close to estimates with a minor rise to 94.6 in October due to a slightly better result for the expectations component. However, the expectations sub-index remains weak.

United Kingdom: The European Union (EU) deferred on providing a new Brexit deadline date until later today or tomorrow. While the majority agreed to January 31, France apparently wanted to impose an earlier November 30 end date.

United States: US negotiators said that US-China talks have progressed very well and suggested that a deal was close. News reports suggest it could be as early as next month. US Treasury Secretary Mnuchin and USTR Lighthizer spoke with China's Vice President Liu He on Friday; the statement from the US side said "They made headway on specific issues and the two sides are close to finalising some sections of the agreement. Discussions will go on continuously at the deputy level, and the principals will have another call in the near future." US President Trump called for Congress to pass the USCMA (US-Canada-Mexico) trade pact and said that China wants a trade deal.

The University of Michigan consumer sentiment survey was finalised at 95.5 for October, marginally below its preliminary release of 96.0. Nevertheless, the trend in consumer sentiment remains an improving one since August’s sub-90 print.

 

Today’s key data and events:

US Chicago Fed Nat Activity Index Sep exp 0.20 prev 0.10 (11:30pm)

US Wholesale Inventories Sep prev 0.2% (11:30pm)

US Trade Sep exp –US$73.5bn prev -$72.8bn (11:30pm)

US Dallas Fed Mfg Activity Oct exp 0.0 prev 1.5 (1:30am)

 

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.

 

Besa Deda, Chief Economist  Ph: 02-8254-3251