Main Themes Markets were mixed as investors digested trade headlines and positive corporate earnings releases ahead of tonight’s Federal Reserve policy decision. The UK is likely headed to the polls for the third time in four years after Labour leader Jeremy Corbyn and Boris Johnson paved the way to hold a general election in December.
Share Markets: Global stock indices were muted with most major markets recording little change. The S&P 500 eased 0.1% after closing at a record high yesterday and the Dow shed 0.1%. Health stocks received a boost after strong earnings announcements from pharmaceutical giants Pfizer and Merck. Tech stocks shed some of yesterday’s gains after Google’s parent Alphabet missed profit estimates and a US official said that work remains to be done if an interim trade agreement with China is to be signed at the Chile summit next month.
Interest Rates: Treasuries fell slightly in cautious trade as investors eye the impending Fed policy decision. Markets are pricing in a cut to 1.50-1.75% which would be the third this year. The US 10-year fell 2 basis points to 1.84% and the 2-year was unchanged at 1.65%.
Australian yields lifted ahead of today’s consumer price index inflation (CPI) data. The 10-year bond lifted 9 basis points to 1.19% while the 3-year rose 8 basis points to 0.82%. Markets are predicting just a 14.4% chance of a rate cut when the Reserve Bank (RBA) meets next Tuesday.
Foreign Exchange: The US dollar index was little changed, falling slightly by 0.07% in a muted session. The market appears to have an eye on the outcome of the Federal Open Market Committee’s (FOMC) ongoing two-day meeting where it is expected to announce another rate cut.
The pound ended a volatile session virtually unchanged at US$1.2860. It was boosted by the news of a likely election but has since pared those gains.
A slightly less dovish tone from RBA governor Philip Lowe during a speech yesterday evening may have turned investors more bullish on the AUD. The Australian dollar is currently up around 0.4% at 0.6864 this morning. A general lift in sentiment around the US-China trade negotiations has also been a support this week as attention shifts to today’s CPI reading.
Commodities: Oil prices were lower, but improved from their lows of the session following reports that Saudi Arabia was prepared to cut production further. WTI futures fell US$0.3 per barrel to US$55.3. Gold prices fell for the second consecutive session and are currently US$1,489 per ounce.
Australia: There was no major economic data published yesterday.
In a speech yesterday afternoon, RBA governor Lowe reaffirmed that negative interest rates were unlikely in Australia. Speaking in Canberra, he urged businesses to take advantage of historically low interest rates while emphasising the third mandate of the RBA, which is to boost the economic prosperity and welfare of Australia (the other two are the inflation target and full employment goal). We expect the interest rate to be cut one more time to 0.5% in February next year.
United Kingdom: UK parliament saw another tumultuous session as lawmakers debated a “short bill” that Boris Johnson was hoping would allow for a general election. The bill now only needs a simple majority in the House of Commons to pass. Opposition MPs had blocked previous attempts to call a general election but Labour leader Jeremy Corbyn has agreed to this legislation. Opposition parties are attempting to amend the bill with additional conditions, including bringing the election date forward by 3 days to the 9th of December from the 12th because they say it will allow university students to vote as they will still be on campus.
United States: Consumer confidence fell for the third straight month as worries about the short-term outlook intensified. Data from the Conference Board showed the consumer confidence index falling 0.4 points to 125.9 in October. The index has been trending lower over the last 15 months as trade war worries have intensified and business sentiment has worsened.
Separate data showed that the housing market remains relatively robust. Pending home sales rose 0.9% in September, suggesting a rebound in actual home sales which declined 2.2% in September. House prices continued to rise, with the CoreLogic Case-Shiller price index rising 3.2% over the year in August. Low mortgage rates and relatively high affordability have boosted demand.
Today’s key data and events:
JN Retail Sales Sep exp 0.8% prev 1.6% (10:50am)
AU CPI Q3 (11:30am)
Headline q/q exp 0.6% prev 0.6%
Headline y/y exp 1.8% prev 1.6%
Trimmed Mean q/q exp 0.3% prev 0.4%
Treamed Mean y/y exp 1.5% prev 1.5%
EZ Economic Confidence Oct exp 101.1 prev 101.7 (9pm)
EZ Industrial Confidence Oct exp -8.8 prev -8.8 (9pm)
EZ Services Confidence Oct exp 9.2 prev 9.5 (9pm)
EZ Consumer Confidence Oct exp -7.6 prev -7.6 (9pm)
US ADP Employment Oct exp 110k prev 135k (11:15pm)
US GDP Q3 exp 1.6% prev 2.0% (11:30pm)
US Personal Consumption Q3 exp 2.6% prev 4.6% (11:30pm)
US Core PCE Inflation Q3 exp 2.2% prev 1.9% (11:30pm)
US FOMC Policy Decision exp 1.50%-1.75% prev 1.75%-2.00% (5am)
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