Main Themes: The more positive mood from easing trade tensions mostly permeated through to another session. Positive US services data was also encouraging. US shares held near record highs, US bond yields and the US dollar rose. The RBA left official interest rates unchanged yesterday, as widely expected.
Share Markets: US shares were mixed. The Dow edged 0.1% higher, but the S&P500 eased 0.1%, after hitting a record high in the previous session.
Interest Rates: Yields on US treasuries edged higher on better sentiment and the encouraging services data. US 10-year yields rose 7 basis points to 1.85%. Market expectations for another rate cut by the Federal Reserve have fallen further to 9.0% from nearly 30% late last week.
Expectations for another RBA rate cut have also lessened slightly following the RBA decision yesterday. Markets are placing a probability of close to 20% for a cut in December, and nearly 40% for February next year.
Foreign Exchange: The US dollar index scaled higher over much of the overnight session, and gained an extra leg up after the positive ISM services data. The yen weakened as risk appetite improved. The Australian dollar bounced after the RBA decision. While the RBA left the official cash rate on hold as widely expected, the commentary shifted its focus towards an improvement in 2021. The AUD climbed to as high as 69.28 US cents before paring gains on broad US dollar strength.
Commodities: Prices of most commodities benefited from the lift in sentiment and easing trade tensions. Oil prices and the CRB commodity price index rose, although gold prices reflecting the wider sell-off in safe havens.
Global: Reports are indicating that China is pressing Trump to remove more tariffs as part of a “phase-one” US and China trade deal. So far, the deal has focussed on Chinese purchases of US agricultural products and intellectual property protections. However, it does not address subsidies to state-owned firms and the forced transfer of foreign technology know-how to Chinese firms, which have been key concerns for the US.
Australia: The RBA left the cash rate unchanged at 0.75% as widely expected. The on-hold decision follows rate cuts of 25 basis points each at the June, July and October meetings. We continue to expect another rate cut in February 2020. The RBA has maintained an easing bias, declaring in the final paragraph of its accompanying statement that it is prepared to ease monetary policy further if needed. We are left with a sense of an RBA waiting for now, but not for long. Another rate cut is likely by early next year. While the RBA did not mention unconventional policies, the spectre of these policies is looming larger.
AiG performance of services index rose from 51.5 in September to 54.2 in October, the highest in 11 months. After dropping below 50 in five months so far this year, it could provide an early indication that the outlook for consumer spending will improve.
China: The Caixin services PMI slipped from 51.3 in September to 51.1 in October, the lowest in eight months. More concerning is a drop in new orders, and a fall in expectations for the outlook one year ahead. The composite index however, improved thanks to a lift in the manufacturing index released earlier in the month.
United States: The services sector in the US, according to the ISM index, improved in October. The non-manufacturing index rose from 52.6 in September to 54.7 in October, suggesting some resilience within services while manufacturing is languishing amid trade tensions. In contrast, the Markit index on services was revised down from 51.0 to 50.6 in the final estimate for October, and below the 50.9 reading in September.
The US trade deficit narrowed to $52.5 billion in September, reflecting a surplus on petroleum products. But the narrowing trade gap included both weakening exports and imports under the weight of tariffs and weaker momentum in the global economy.
Today’s key data and events:
NZ Employment Change Q3 exp 0.2% prev 0.7% (8:45am)
NZ Unemployment Rate Q3 exp 4.1% prev 3.9% (8:45am)
NZ Avg Hourly Earnings Q3 exp 1.0% prev 1.1% (8:45am)
EZ Retail Sales Sep exp 0.0% prev 0.3% (9pm)
US Federal Reserve’s Evans Speaks (12am)
US Federal Reserve’s Williams Panel Presentation (1:30am)
US Unit Labour Costs Q3 exp 2.2% prev 2.6% (12:30am)
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.
Janu Chan, Senior Economist Ph: 02-8253-0898