Bank of Melbourne

Morning Report

Main Themes: Investors’ appetite for risk waned after news outlets reported that US-China trade negotiations are stalling.


Main Themes: Investors’ appetite for risk waned after news outlets reported that US-China trade negotiations are stalling.

Share Markets: US share market bourses fell by the most in three weeks, as news around trade rattled investors. The Dow Jones fell 140 points (or -0.5%) and the S&P 500 index dropped 9 points (or -3%).

Interest Rates: US bond yields fell sharply overnight. The US 2-year yield fell 8 basis points to 1.52% and the US 10-year yield fell 9 basis points to close at 1.68%. Interest-rate markets are pricing a Federal funds rate of 1.51% at the December meeting and a terminal rate of 1.15% (versus 1.625% currently).

Australian 3-year government bond yields fell from 0.80% to 0.77% and the Australian 10-year yield declined from 1.14% to 1.09%. Interest-rate markets are pricing in only a small chance of an RBA rate cut in November. But are pricing in another rate cut by early next year.

Foreign Exchange: The AUD was the underperformer overnight. It fell from a three-month high of 0.6930 to an overnight low of 0.6883.

The Australian dollar has closed within a 0.6700-0.6900 range every day since late July. The mid-October bounce has been aided by a more positive tone on US-China trade talks, but is unlikely to be more durable than the early September rally. Iron ore prices are rolling over on patchy demand and resilient supply. Moreover, US and China still have major hurdles, which will keep some tariffs in place.

Limiting the downside for the AUD, however, is our expectation that the RBA will hold the cash rate steady until early next year. Speculative short AUD positioning is also substantial. We expect any near-term probes above 0.6900 to attract sellers.

Our year-end target for the AUD/USD exchange rate remains at 0.6700.

Commodities: Iron ore, gold and oil prices were weaker in overnight trade.

Australia: Building approvals rose 7.6% in September, ending three months of consecutive declines. Despite the increase in monthly terms, the level of approvals remains weak. On an annual basis, dwelling approvals were down 19.0% in September.

By segment, multi-density building approvals outperformed, reflecting an improvement in finance approvals for construction activity in recent months. The pick-up also reflects a recovery in dwelling prices nationally, especially in Sydney and Melbourne. High-rise approvals surged 16.1% over the month. House approvals were also higher, rising by 2.7%.

The latest increase doesn’t signal the end of the prevailing weakness in residential construction. We are not at a turning point. Approvals can be volatile on a month-to-month basis and have been trending lower since last 2017. Developers have been scaling back projects in response to the slowdown in demand from its peak and uncertainty amid building-quality issues.

In other data, private-sector credit grew by only 0.2% in September, matching the monthly average for the 2019 year to date. In the month, housing credit lifted 0.2%; business credit expanded 0.4% and personal credit contracted 0.7%.

Annual credit growth slipped further below 3%, to 2.7%, the softest outcome since mid 2011.

Of note, new lending for housing has turned the corner - with a 12% rebound over June to August, more than reversing the near 6% fall over the initial five months of the year.

The housing rebound has been supported by a number of factors. Sentiment bounced after the May Federal election, which removed uncertainty around tax policy for the sector. The RBA has lowered rates since June by a total of 75 basis points. In addition, APRA has eased mortgage serviceability assessments.

Europe: The advance estimate for GDP for Q3 rose by 0.2%, beating consensus estimates for a smaller rise of 0.1%. In annual terms, growth was slightly softer at 1.2%, compared with 1.1% in Q2.

The advance annual estimate for core consumer prices rose from 1.0% in September to 1.1% in October. The data highlights that inflation pressures remain soggy in the euro area region.

United States: There are media reports citing “Chinese officials” as saying that US-China trade negotiations beyond Phase 1 were unlikely to progress without current tariffs being removed. Chinese officials also apparently said they will not budge on the thorniest of issues and are concerned the US will back out of even a limited deal. Meanwhile, US and China said discussions were progressing well and US President Trump tweeted that a new venue would be found for the proposed deal signing.

US President Trump also tweeted about the Federal Reserve being too slow to cut and that the US dollar and interest rates were hurting US businesses whilst Germany, Japan and all others benefitted: “China is not our problem, the Federal Reserve is!”

The US House of Representatives voted 232-196 for an impeachment inquiry. It was the first House vote since the inquiry began, but is still not a formal vote to open impeachment proceedings. It is only a measure of support for the process.

The MNI Chicago purchasing managers’ index (PMI) fell to 43.2 in October, from 47.1 in September, led lower by falling new orders and employment.

Personal income lifted by 0.3% in September, from an upwardly revised increase of 0.1% in August. Personal income was also up 0.3% in September. The core personal-consumption-expenditure (PCE) deflator that is closely watched by the Federal Reserve eased to1.7% year-on-year in September. In the prior month it was 1.8% in annual terms.


Today’s key data and events:

AU CoreLogic House Prices Oct prev 1.1% (10am)

JN Jobless Rate Oct exp 2.2% prev 2.2% (10:30am)

AU PPI Q3 prev 0.4% (11:30am)

CH Caixin PMI Mfg Oct exp 51.0 prev 51.4 (12:45pm)

UK Markit PMI Mfg Oct exp 48.2 prev 48.3 (8:30pm)

US Non Farm Payrolls Oct exp 98k prev 136k (11:30pm)

US Unemployment Rate Oct exp 3.6% prev 3.5% (11:30pm)

US ISM Mfg Index Oct exp 48.9 prev 47.8 (1am)

US Construction Spending Sep exp 0.2% prev 0.1% (1am)


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