Bank of Melbourne

Morning Report

Main Themes: Overnight was uneventful. Equities were mixed and US bond yields declined. There were fresh comments from US President Trump on trade, but investors’ appetites towards risk remained on the mend.
Share

Main Themes: Overnight was uneventful. Equities were mixed and US bond yields declined. There were fresh comments from US President Trump on trade, but investors’ appetites towards risk remained on the mend.

Share Markets: US share markets were mixed overnight. The Dow Jones finished flat and the S&P 500 index rose 5 points to a fresh record high (or +0.2%).

Interest Rates: US 2-year treasury yields fell from 1.69% to 1.65%. US 10-year yields fell from 1.95% to 1.91%. Interest-rate markets are pricing a near zero chance of easing at the Federal Reserve’s December meeting.

Australian 3-year government bond yields fell from 0.86% to 0.82%. Australian 10-year yields ranged between 1.28% and 1.31%. Interest-rate markets are pricing a 15% chance of easing at the RBA’s December meeting and a terminal rate of 0.55%.

Foreign Exchange: Another trading session and another tight trading range for the AUD/USD exchange rate. The AUD/USD kept to a 0.6832-0.6886 range and is currently trading around 0.6840.

One of the biggest movers in the past 24 hours was the NZD. NZD/USD moved from near the 0.6370 handle to a low yesterday of 0.6325 after disappointing inflation expectations data cemented the case for a rate cut later today from NZ’s central bank. AUD/NZD appreciated from a low yesterday of 1.0757 to a high overnight of 1.0838 and remains near this high.

Commodities: Gold fell to a three-month low overnight, as investor appetites towards risk continued to improve.

Australia: Business sentiment ticked up over the month in October, but remains well below its long-run average. The NAB monthly business survey has shown that business confidence and operating conditions have languished in 2019, despite easier monetary policy and tax breaks.

The confidence index rebounded from 0 in September to 2 in October. Conditions registered a 1 point increase to 3. Despite the latest increases, both the confidence and conditions indices remain below their 10-year averages of 5 and 6, respectively.

All sub-components of the conditions index lifted over the month, but continue to point to challenges in the operating environment. The biggest gain was in the trading conditions which rose 3 points to 7, its highest value since July.

On a positive note, forward orders rose 5 points to 3 in October, its first positive outturn in a year. Capacity utilisation fell marginally over the month to 81.7% from 81.8%, but appears to have settled just above its long-run average.

The reluctance of businesses to respond positively to rate cuts presents a downside risk to economic growth.

New Zealand: We expect the Reserve Bank of New Zealand (RBNZ) to cut the official cash rate by 25 basis points to a fresh record low of 0.75% later today. Growing signs of weakness in the domestic economy and deteriorating inflation expectations are likely to tip the RBNZ’s hand toward further easing.

Europe: The ZEW measure of confidence improved in the euro area in November to -1.0, from -23.5 in October.

United Kingdom: The unemployment rate eased to 3.8% in the three months to September, from 3.9% in the previous period. However, employment fell by 58k in the three months to September, after a fall of 56k in the previous month. The jobs data is in keeping with the broader slowdown seen in hiring activity.

United States:  US markets returned from a long weekend, but data was thin. The NFIB measure of small business optimism rose from 101.8 in September to 102.4 in October, but the index remains off the highs recorded over 2018.

US Federal Reserve Bank of Philadelphia President, Patrick Harker, said overnight that he was against the US Federal Reserve cutting last month. He suggested he is now in the wait-and-see camp.

US President Trump said a "significant" phase-one trade deal with China could happen soon, but warned he will "substantially raise" tariffs if no agreement is reached.

 

Today’s key data and events:

AU MI-WBC Consumer Confidence Nov prev 92.8 (10:30am)

AU Wage Price Index Q3 exp 0.5% prev 0.7% (11:30am)

NZ RBNZ Official Cash Rate Decision exp 0.75% prev 1.00% (12pm)

UK CPI Core Oct y/y exp 1.7% prev 1.7% (8:30pm)

EZ Industrial Production Sep exp -0.2% prev 0.4% (9pm)

US CPI Core Oct exp 0.2% prev 0.1% (12:30am)

US CPI Core Oct y/y exp 2.4% prev 2.4% (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.

 

Besa Deda, Chief Economist Ph: 02-8254-3251