Bank of Melbourne

Morning Report

Main Themes: US share market indices marched to fresh record highs, underpinned by investor optimism on US-China trade. US bond yields and the US dollar also lifted on this optimism. Meanwhile, locally investors await the RBA board meeting. Financial markets expect the RBA to sit on the sidelines, but the accompanying statement will be closely gleaned for clues as to the timing of the next move.
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Main Themes: US share market indices marched to fresh record highs, underpinned by investor optimism on US-China trade. US bond yields and the US dollar also lifted on this optimism. Meanwhile, locally investors await the RBA board meeting. Financial markets expect the RBA to sit on the sidelines, but the accompanying statement will be closely gleaned for clues as to the timing of the next move.

Share Markets: US share markets climbed to new records with the Dow Jones claiming its first all-time high since July and the S&P 500 and Nasdaq also hitting new highs. These indices, however, pared gains by the close. At the close, the Dow Jones finished 115 points higher (or +0.4%) and the S&P 500 ended 11 points up (or +0.4%).

Interest Rates: US 2-year treasury yields rose 4 basis points to close at 1.59%. US 10-year yields lifted by 7 basis points to close at 1.78%. Interest-rate markets are pricing only 4 basis points of easing at the Fed’s December meeting and a terminal rate of 1.27%.

Australian 3-year government bond yields rose from 0.83% to 0.85%, currently at 0.84%. Meanwhile, Australian 10-year yields rose from 1.18% to 1.22%, currently at 1.21%.

Foreign Exchange: The US dollar index was modestly higher in the overnight session. EUR/USD fell from an overnight high of 1.1175 to 1.1135. USD/JPY rose from 108.20 to 108.63. The AUD/USD pair fell from 0.6925 to 0.6877. NZD/USD fell from a three-month high of 0.6466 to 0.6404. And the AUD/NZD bounced off 1.0710 to 1.077.

Commodities: Most commodities rose in overnight trade on trade optimism. Gold fell.

Australia: The RBA board meets today and we expect the RBA to leave the cash rate unchanged at 0.75%. This unchanged expectation is a universal one with financial markets pricing only a 5% chance of a move today. The focus will be on the guidance in the accompanying statement and on any adjustments to the Bank’s forecasts which will be released on Friday in the Statement on Monetary Policy.

Very soggy retail sales data for September dominated local economic news yesterday. In monthly nominal terms, retailing rose by only 0.2%. In annual terms, retail sales were unchanged at 2.5% and well under the long-run average of 3.5%. Much of the soft result in September was due to falls in the discretionary categories of clothing, footwear & personal accessories and department-store sales.

Accompanying the tepid increase in nominal retail sales, quarterly retail sales, which exclude price effects, fell by 0.1% in Q3. The quarterly volume of retail sales has declined for three of the past four quarters. On an annual basis, retailing volumes shrunk 0.2%, the first fall since the depths of Australia’s last recession in 1991.

The volumes measure provides a good guide to household consumption’s contribution to the national accounts for the quarter, so the outcome opens up downside risk for GDP in Q3.

Hopes that consumer spending will improve over the second half of 2019 have been dashed by the weak outturn. Consumers have failed to be inspired to spend, despite a government-tax-related boost, rate cuts and a recovery underway in dwelling prices.

In a separate release, job advertisements weakened further in October, according to data from the ANZ. Job ads fell 1.0% in October, leaving the annual figure 11.4% lower. Job ads have been persistently weak recently, which is at odds with the relatively solid employment gains reported by the Australian Bureau of Statistics (ABS). The continued weakness in job ads injects a further note of caution into the health of the labour market.

News reports this morning refer to Federal Treasurer Josh Frydenberg taking off pressure on the RBA to make further interest rate cuts by allowing it more time to get inflation back within its 2-3% per annum target, declaring there will be no change to the official agreement on monetary policy in light of global uncertainties. Frydenberg, who will meet with the Reserve Bank board on Tuesday after its monthly interest rate meeting, said that while underlying inflation had been below the target for 15 quarters, he still expected it would return to its target over the 'medium term'.

United States: Factory orders fell 0.6% in September, after a fall of 0.1% in August. Moreover, the final reading for durable goods orders for September was revised downwards, from a decline of 1.1% in the month to a fall of 1.2%. The trade war has been heightening uncertainty and impacting business-investment and manufacturing activity. This data reflects these negative impacts.

According to news reports, China is reviewing US locations where China’s Xi Jinping would be willing to meet US President Trump to sign the first phase of a trade deal. While officials in Beijing had hoped the Chinese president would travel to the US on a state visit, they're open to having him go even if it isn't. On Monday, Premier Li Keqiang met senior American officials including Wilbur Ross in Bangkok.

 

Today’s key data and events:

AU AiG Perf of Services Index Oct prev 51.5 (8:30am)

US Federal Reserve’s Daly Speaks (9am)

CH Caixin China Composite PMI Oct prev 51.9 (12:45pm)

CH Caixin China Services PMI Oct exp 51.1 prev 51.3 (12:45pm)

AU RBA Board Meeting, Cash Rate exp 0.75% prev 0.75% (2:30pm)

AU Melbourne Cup Main Race prev Cross Counter (3pm)

EZ PPI Sep exp 0.1% prev -0.5% (9pm)

US Federal Reserve’s Barkin Speaks (12am)

US Trade Balance Sep exp -US$52.5bn prev  -US$54.9b (12:30am)

US JOLTS Job Openings Sep exp 7,088 prev 7,051 (2am)

US ISM Non-Manfucturing Index Oct exp 53.4 prev 52.6 (2am)

NZ QV House Prices Oct y/y prev 2.4% (3am)

US Federal Reserve’s Kaplan Speaks (4:40am)

 

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