Bank of Melbourne

Morning Report

Main Themes: All three major US stock indices closed at record highs on Friday, despite conflicting headlines about US-China trade negotiations. Inflation data out of China released over the weekend showed a surge in food prices, but factory prices remain subdued.

Main Themes: All three major US stock indices closed at record highs on Friday, despite conflicting headlines about US-China trade negotiations. Inflation data out of China released over the weekend showed a surge in food prices, but factory prices remain subdued.

Share Markets: The S&P 500 posted its fifth straight weekly increase after rising a further 0.3% on Friday. The Dow Jones was broadly flat at its closing record high as stocks teetered following suggestions from US President Trump that the first phase of a US-China trade pact is not a done deal. Trade sentiment was the primary driver of US stock market movements last week.

European share markets were mixed despite better-than-expected German exports. The German DAX and London’s FTSE 100 were down 0.5% and 0.6% respectively while the Euro Stoxx 50 fell 0.2%. European markets are closed today due to the Armistice Day public holiday.

Interest Rates: US treasury yields pulled back from their three-month highs on Friday as investors recalibrated expectations for an agreement to roll back tariffs. The US 10-year was range bound, ending the session yielding 1.93%, up one basis point. The 2-year fell one basis point to 1.67%.

The interest rate differential between US yields and the yields on government debt for most other advanced economies widened last week. The US 10-year yield rose 23 basis points last week compared with a 19 basis point rise in the Australian 10-year government bond yield.

Foreign Exchange: The US dollar hit a three week high on Friday amid mixed reports about the likelihood of tariffs being reset in the US-China trade dispute. The US dollar index rose 0.2% on safe-haven buying. The yen also strengthened while the euro fell.

The Australian dollar ended the week 0.6% lower and is currently at US$0.6855.

Commodities: Oil prices ended up rising on Friday, erasing a one-percent drop after Trump made conflicting comments about the prospect of a phase one US-China trade deal. Posturing by OPEC officials that further cuts to oil supply will not be required have put downward pressure on oil prices over the last week.

Corn prices jumped following the release of the US Department of Agriculture’s report on corn harvests. The report lowered forecasts for crop yield due to cold and wet conditions late in the growing season in many states across the US.

Australia: The housing market is showing further signs of a pickup. Home lending (excluding refinancing) rose 1.3% in value terms in September, the fourth consecutive monthly increase.

A major surprise was that the gain was entirely driven by owner-occupiers. The value of owner- occupier lending rose 1.0% in September. The value of investor lending fell 4.0%. It was the first drop in investor loans in four months, but the overall trend continues to be upwards.

The housing market recovery is likely to continue, with the prospect of further monetary easing on the cards. That said, the current spurt in dwelling price growth is unlikely to be maintained at the same pace, particularly in Sydney and Melbourne. A higher starting point for dwelling prices and a limitation in how far interest rates can fall from here would suggest some moderation in growth, although the upswing is expected to continue.

In a separate release, the Statement of Monetary Policy confirmed that the Reserve Bank (RBA) has once again downgraded its near-term outlook for the economy. The RBA expects GDP growth to be below trend at 2.25% in 2019 before rising back to 2.75% in 2020. It expects a dip in underlying inflation to 1.5% in the December quarter before a steady rise back to the lower end of its target range of 2-3% by December 2021.

On the labour market, the RBA appears to have conceded that the unemployment rate is likely to remain well above the level at full employment (which it estimates is 4.5%) for the remainder of the outlook. Wages are expected to remain around their current level for some time.

The Statement noted that the evident spare capacity in the economy and lack of progress in bringing inflation to its target range contributed to the case for further easing.

In considering monetary policy settings, the Board was mindful that rates were already very low and that each further cut brings closer the point at which other policy options might come into play. Its acknowledgement that further easing could begin to have less of an impact as rates approach the effective lower bound highlights that the RBA has been contemplating unconventional monetary policies.

China: Consumer prices surged 3.8% over the year in October due to a more than doubling of pork prices. Food prices were up 15.5%, contributing 3.37 percentage points of the overall price increase. The huge increase in pork prices recently is due to an outbreak of swine flu which has decimated pig herds in several countries.

Meanwhile, producer prices moved further into deflationary territory with a 1.6% fall over the year. The People’s Bank of China (PBoC) has been making piecemeal cuts to monetary policy in response to the emerging slack evident from the weekend’s falling producer prices.

Other data showed that both imports and exports fell, but by less than expected in October. Exports contracted 0.9% over the year while imports were down 6.4%.

Europe: German exports rose 1.5% over the month in September, their biggest gain in nearly two years. The increase surprised markets, and lessens the likelihood that the entire German economy registered a technical recession in Q3. GDP was down 0.1% in Q2 and manufacturing PMIs have been pointing to further pain in Q3.

Canada: There was an unexpected drop of 1,800 net jobs in October, below the median consensus of a 15,900 gain. The unemployment rate remained steady at 5.5% while the wage rate increased by more than expected at 4.4%. The monthly job numbers can be volatile, but the latest fall injects a note of caution to the labour market. Solid employment growth has been one of the bright spots of the Canadian economy over the past year.

United States: President Trump said that trade negotiations were “going very nicely” but was vague around the prospect of rolling back existing tariffs. On the removal of existing tariffs he said “I haven’t agreed to anything”. This conflicts with statements from Chinese and US officials who had said that a rollback of tariffs was likely to be part of a phase one deal.



Today’s key data and events:

NZ Credit Card Spending Retail Oct exp 0.4% prev 0.4% (8:45am)

JN Core Machine Orders Sep exp 0.9% prev -2.4% (10:50am)

JN Current Account Sep exp ¥1710.0b prev exp ¥2157.7b (10:50am)

UK GDP Q3 preliminary exp 0.4% prev -0.2% (8:30pm)

UK Industrial Production Sep exp -0.1% prev -0.6% (8:30pm)

UK Manufacturing Production Sep -0.2% prev -0.7% (8:30pm)

US Fed’s Rosengren Speaks in Oslo (12:15am)


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