Main Themes: Investors turned more positive towards risk amid progress on US-China trade negotiations and a stronger-than-expected labour market report in the US.
Share Markets: The S&P 500 rose to another fresh record high, closing 1% higher at 3,066.9. The Dow also rose, closing 301 points (or 1.1%) higher on Friday. Equities were bolstered around the world by continued signs that the US labour market remains in good stead and from improved trade sentiment.
Interest Rates: US bond yields were relatively volatile, but were broadly higher as investors weighed positive comments on trade and strong labour market data against continued weakness in manufacturing sentiment. The US 10-year rose 4 basis points to 1.73% while the 2-year was stronger by the same amount at 1.56%. At the short end, the 3-month bill saw a 1 basis point fall in its yield to 1.53%. The US yield curve has been steepening recently, moving further into “normal” territory.
Australian yields recorded relatively little change. The 10-year is at 1.14% and the 3-year yield is 0.81%.
Foreign Exchange: The US dollar index closed 0.1% lower on Friday as risk sentiment turned broadly positive. The US dollar initially gained after better-than-expected jobs data, but subsequently retreated and remained range-bound for the rest of the session. A further contraction in US manufacturing sector sentiment weighed on the currency. The Australian dollar registered a further gain on Friday, rising for 4 of the 5 sessions during the week. Positive Chinese factory sentiment data helped support the AUD, as did positive news on the prospect of the formalisation of the first phase of a US-China trade deal. The Australian dollar is currently at 69.17 US cents, breaking above US$0.6900 for the first time since July.
Commodities: Oil prices rose on Friday on upbeat US jobs data and an unexpected rise in Chinese manufacturing sector sentiment, but remained down on the week amid the continued concerns over trade concerns that have dominated news. WTI futures are currently at US$56.0 per barrel. Gold was broadly unchanged after ranging from gains to losses and is currently US$1,514 per ounce.
Australia: The recovery in dwelling prices picked up pace in October. Data from CoreLogic showed that median dwelling prices across 8 capital cities rose by 1.4% over the month, the fastest monthly growth rate in almost 10 years. Prices have risen for four consecutive months since bottoming in June.
Dwelling prices gained the most in Sydney and Melbourne in October. Sydney prices lifted 1.7% for the second consecutive month while Melbourne saw a whopping 2.3% increase. Melbourne’s rise was the most since November 2009 when prices were recovering from their GFC lows.
Growth in other capital cities was broad based. All other capitals except for Perth recorded an increase in prices over the month. Prices ranged from 0.9% growth in Hobart to a 0.4% fall in Perth.
The recovery in prices in recent months has been less pronounced outside of Sydney and Melbourne. However, these other cities experienced a shallower downturn. In October, Canberra and Hobart surpassed the peaks registered in the previous cycle. Sydney prices remain 10.4% below their recent peak and Melbourne 5.8% below.
China: Chinese manufacturing companies were more upbeat in October, according to the Caixin/Markit Purchasing Managers Index (PMI). The index rose to 51.7 in October from 51.4 in September, which puts it at the highest in 2 years.
Surprisingly, given the US-China trade tensions, new export orders rose and activity measures jumped. Some of the gain could be attributed to infrastructure spending by the authorities and a temporary exemption of tariffs granted by the US for some Chinese goods.
United States: US economic data was mostly positive on Friday, as stronger-than-expected jobs data and construction spending outweighed a further contraction in manufacturing sector activity.
Non-farm payrolls increased 128k in October, beating expectations of an 85k increase. Additionally, there were strong upward revisions for September and August. The better-than-expected increase is a positive for consumer spending, which has been the mainstay of the current US economic expansion. Other areas of the report show that wages growth was tepid at 0.2%, suggesting that the labour market retains some slack. The unemployment rate edged up to 3.6% from 3.5% due to an increase in the participation rate. The manufacturing sector shed 36,000 jobs in October, but this was caused by a strike among 46,000 GM workers across some of its auto manufacturing plants.
Meanwhile, broader manufacturing conditions remain difficult. The ISM manufacturing PMI increased to 48.3 in October from September’s 10-year low of 47.8. The increase was lower than expected and remains below the 50 level, indicating contraction. The improvement was led by an uptick in the employment index to 47.7 and new orders which rose to 49.1 from 47.3 in September.
Other data showed that construction spending increased by 0.5% in September, as investment into home building rose to the highest in 9 months.
Officials were upbeat on the prospect of formally signing the US-China “Phase One” trade deal on Friday. Despite comments from Chinese officials earlier in the week which cast doubt on the probability of coming to a long-term agreement, both sides appeared confident that a document for a partial agreement will be signed in the next month.
US president Donald Trump said that he hoped to sign an agreement with Chinese president Xi Jingping at a US location following the cancellation of the APEC summit scheduled in Chile this month. Commerce Secretary Wilbur Ross made comments in an interview that he expected a deal to be signed this month and that the government would soon be granting licences to American companies to sell to Huawei, which has had operating restrictions placed on it by the US.
Today’s key data and events:
AU MI Inflation Gauge Oct prev 0.1% (11am)
AU ANZ Job Ads Oct prev 0.3% (11:30am)
AU Retail Sales Sep exp 0.5% prev 0.4% (11:30am)
AU Real Retail Sales Q3 exp 0.4% prev 0.2% (11:30am)
US Durable Goods Orders Sep Final exp -1.1% prev -1.1% (2am)
US Factory Orders Sep exp -0.5% prev -0.1% (2am)
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