Bank of Melbourne

Morning Report

Main Themes: Risk appetite was dented by a Wall Street Journal report that US-China trade talks “hit a snag” over farm purchases. Shares were mixed, although bond yields were lower. The Australian dollar was also slightly lower.

Main Themes: Risk appetite was dented by a Wall Street Journal report that US-China trade talks “hit a snag” over farm purchases. Shares were mixed, although bond yields were lower. The Australian dollar was also slightly lower.

Share Markets: US shares were mixed, as the run of positive sentiment over the past couple of weeks was shaken up by a report in the Wall Street Journal that US-China trade negotiations faced a hurdle with regards to the Chinese purchase of US agricultural products. 

Interest Rates: Yields on US treasuries fell, despite comments from Fed Chair Powell reinforcing an on hold stance by the Federal Reserve. The decline was mostly as a result of weaker risk appetite. US 10-year yields fell 5 basis points to 1.88%.

Foreign Exchange: The US dollar index trended sideways, while the yen strengthened as risk aversion lifted. The New Zealand dollar was the big mover yesterday as the RBNZ surprised markets by leaving official interest rates on hold. The Australian dollar spiked in tandem on the RBNZ announcement, but quickly gave way and lost further ground in the overnight session as trade negotiations appeared to hit a bump in the road. AUD is just slightly lower this morning at close to 68.4 US cents.

Commodities: Oil prices edged higher, helped by comments from the OPEC Secretary General expressed confidence in the global economy given hopes of a US-China trade deal. Gold prices rose as its safety appeal lifted.

Australia: Wages grew at a paltry rate of 0.5% in the September quarter, the same outturn registered for the June quarter. On an annual basis, growth ticked down to 2.2%, the lowest since June 2018. Growth was muted in both the private and public sectors. Each registered a 0.5% increase over the quarter. At 2.5%, wage growth in the public sector remains higher than in the private sector on an annual basis. Annual private-sector wage growth was 2.2% in the September quarter, down from 2.3% in the June quarter.

Public sector wages were boosted in the previous quarter by an increase in Victorian public sector wages for healthcare workers.

A 3% increase in the minimum wage came into effect on July 1. Industries more sensitive to minimum wage changes outperformed over the quarter. Among these were retail trade (1.1%), accommodation (1.6%) and warehousing and transport (1.1%)  On an annual basis, wage growth remained highest for the healthcare & social assistance sector.

Low wages growth has been a key factor behind inflation remaining below the lower bound of the Reserve Bank’s (RBA) target 2-3% per annum band. Spare capacity in the labour market has persisted throughout 2019, as a rising participation rate and high population growth has offset gains in employment. In its November Statement on Monetary Policy, the RBA acknowledged that this trend is likely to continue, suggesting that inflationary pressures remain scarce.

New Zealand: The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) on hold yesterday at 1.00% and signalled an easing bias. The outcome took financial markets by surprise.

Europe: Industrial production edged up 0.1% in September, against expectations for a 0.2% decline. Industrial activity has grown in the last two months, suggesting some stabilisation, although as a trend, factory activity remains weak.

United Kingdom: Headline CPI fell 0.2% in October, which saw the annual rate ease from 1.7% to 1.5%. It was below the median estimate of 1.6%, and now the weakest since late 2016.  Falling prices reflected a new energy price cap. Core inflation was steady at an annual rate of 1.7%, but remains muted, and below the BOE’s target of 2.0%. Combined with a sluggish economy, it further points to additional monetary policy easing.

United States: US Federal Reserve Chair Powell confirmed the stance that the Fed was on the pause button on interest rates, saying that “the current stance of monetary policy was likely to remain appropriate”. A caveat did remain that it was as long as the economy remained on track, and Powell also warned of “noteworthy risks”. Powell also made mention of negative interest rates and said that they “would certainly not be appropriate in the current environment”.

US inflation was stronger-than-expected, picking up from an annual rate of 1.7% in September to 1.8% in October. Nonetheless, core inflation (which excludes food and energy) eased from an annual rate of 2.4% to 2.3%, further highlighting that underlying inflationary pressures remain muted.


Today’s key data and events:

NZ REINZ House Sales Oct y/y prev 3.3% (7am)

JN GDP Q3 Annualised Q3 exp 0.9% prev 1.3% (10:50am)

AU MI Consumer Inflationary Expectations Nov prev 3.6% (11am)

AU Employment Change Oct exp 15.0k prev 14.7k (11:30am)

AU Unemployment Rate Oct exp 5.2% prev 5.2% (11:30am)

AU Industrial Production Oct y/y exp 5.4% prev 5.8% (1pm)

AU Retail Sales Oct y/y exp 7.8% prev 7.8% (1pm)

AU Tertiary Industry Index Sep exp 1.1% prev 0.4% (3:30pm)

UK Retail Sales Ex Auto Fuel Oct exp 0.2% prev 0.2% (8:30pm)

EZ Employment Q3 prev 0.2% (9pm)

EZ GDP Q3 q/q exp 0.2% prev 0.2% (9pm)

US PPI Oct exp 0.3% prev -0.3% (12:30am)

US Initial Jobless Claims Nov 9 exp 215k prev 211k (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