Bank of Melbourne

Morning Report

Main Themes: The US Federal Reserve cut its policy rate by 25 basis points, but did not signal more rate cuts are likely. Indeed, the Fed dropped its pledge to "act as appropriate to sustain the expansion”. In response, the US dollar and US bond yields initially rose and US equities fell slightly. But these reactions were quickly unwound, as markets concluded further easing is possible.
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Main Themes: The US Federal Reserve cut its policy rate by 25 basis points, but did not signal more rate cuts are likely. Indeed, the Fed dropped its pledge to "act as appropriate to sustain the expansion”. In response, the US dollar and US bond yields initially rose and US equities fell slightly. But these reactions were quickly unwound, as markets concluded further easing is possible.

Share Markets: US share markets finished higher at the close, but weakened slightly after the Fed decision to cut rates. The Dow Jones rose by 115 points (or +0.4%) and the S&P 500 index finished 10 points higher (or +0.3%).

Interest Rates: US 2-year treasury yields jumped 6 basis points to 1.67% in response to the Fed, but then unwound that reaction and are sitting 4 basis points lower than yesterday. The US 10-year yield spiked 3 basis points on the Fed before falling to 1.78%, which is down 6 basis points compared with the previous close.

Australian 3-year government bond yields are 3 basis points lower at 0.77%, after only briefly spiking to 0.80% after the Fed. The Australian 10-year yield is 2 basis points lower at 1.12%.

Foreign Exchange: The US dollar index was lower in overnight trade. EUR/USD made an overnight high of 1.1127 before falling after the Fed rate cut to 1.1080, but is back at 1.1130. USD/JPY rose from 108.80 to a three-month high of 109.29, but is back at 108.95. AUD/USD fell from an overnight high of 0.6876 to 0.6849 posts Fed, but is currently higher at 0.6901. NZD/USD similarly dipped from 0.6368 to 0.6333, before rebounding to 0.6374. AUD/NZD extended recent gains to a one-month high of 1.0825.

Commodities: Oil, gold and a widely-watched commodity-price basket fell overnight.

Australia: Consumer prices data continue to paint a subdued picture for inflation. Trimmed-mean inflation, which is the RBA’s preferred measure of underlying inflation, rose 0.4% in the September quarter. It was unchanged from last quarter and the same as every quarter for five of the past six quarters. On an annual basis, underlying inflation was also steady at 1.6%.

The underlying measure has remained below the Reserve Bank (RBA)’s target band of 2-3% per annum for almost 4 years.

Headline inflation rose 0.5% in the quarter, in line with consensus expectations. At an annual rate of 1.7%, the headline number confirms that price growth in the economy remains soggy.

There were some signs of price pressures in selected areas. Meat prices rose due to the drought and some imported goods saw price increases due to the lower Australian dollar. But these price pressures were limited and not enough to offset the muted and broader-based price pressures elsewhere in the economy.

The latest soft reading means that another RBA rate cut appears highly likely and the conversation will continue to heat up around unconventional monetary policy. We continue to expect the RBA to cut rates once more in February next year, but cannot rule out a move in December. We also flag the possibility of the RBA implementing unconventional policy on or after the next rate cut.

Canada: The Bank of Canada (BoC) left its benchmark target rate unchanged at 1.75%, as widely expected. However, the BoC surprised markets by lowering growth and inflation profiles for 2020 and 2021. The BoC stressed that global downside headwinds outweighed any domestic upside risks.

Japan: Retail spending jumped ahead of the October 1 tax hike. September data for consumer spending showed a 7.1% increase over the month, as shoppers rushed to make purchases before the tax was introduced.

United States: The US Federal Reserve cut its policy rate by 25 basis points to a mid-point for the Federal funds rate of 1.625%. It is the third consecutive rate cut this year and was widely anticipated by financial markets.

The accompanying statement did not clearly signal further cuts, but retained the optionality to do so. The statement was largely a copy of September’s, but the Fed dropped its pledge to "act as appropriate to sustain the expansion," while adding a promise to monitor data as officials assess their next move. Two members – George and Rosengren - voted against the 25 basis point cut, preferring no change. Traders trimmed bets of more easing this year.

In the press conference, Federal Reserve Chair Powell characterised the latest rate cut as insurance to maintain economic strength and said the policy stance is appropriate given known information.

The advance estimate for GDP grew at an annualised rate of 1.9% in Q3, down from the final outcome of 2.0% in Q2. The outcome was above market expectations of 1.6%. Growth was supported by strong consumer spending, which increased by 2.9%.

ADP employment rose by 125k in October, beating consensus estimates that centred on a result of 110k. However, the prior month’s result was revised down heavily from 135k to 93k.

 

Today’s key data and events:

NZ Building Permits Sep prev 0.8% (8:45am)

JN Industrial Production Sep exp 0.4% prev -1.2% (10:50am)

AU Building Approvals Sep exp 0.5% prev -1.1% (11:30am)

AU Private Sector Credit Sep exp 0.2% prev 0.2% (11:30am)

CH Manufacturing PMI Oct exp 49.8 prev 49.8 (12pm)

CH Non-Manufacturing PMI Oct exp 53.6 prev 53.7 (12pm)

EZ Unemployment Rate Sep exp 7.4% prev 7.4% (9pm)

EZ GDP Q3 exp 0.1% prev 0.2% (9pm)

EZ Core Consumer Prices Oct y/y exp 1.0% prev 0.9% (9pm)

US Personal Spending Sep exp 0.3% prev 0.1% (11:30pm)

US PCE Deflator Sep exp 0.0% prev 0.0% (11:30pm)

US MNI Chicago PMI Oct exp 48.0 prev 47.1 (12:45am)

 

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