Main Themes: It was another directionless night in markets given there was little new developments on the trade front. US shares were mixed and bond yields were down. The Australian dollar is higher despite a dovish surprise from the RBA.
Share Markets: Equity markets had another mixed session. The Dow hit an intraday high, but then lost gains on weak forecasts from major US retailers. Investors are tentative with markets already near record high levels and without more concrete developments on a trade deal. That said, the Nasdaq was boosted by higher tech stocks. The Dow ended 0.4% lower, while the S&P500 was flat.
Interest Rates: Yields on US treasuries fell suggesting a mildly risk aversion, and given little new positive developments on trade. US 10-year yields fell 3 basis points to 1.78%. US 2-year yields were little changed at 1.60%.
Foreign Exchange: The US dollar trended sideways, while the euro gained slightly. The Australian dollar dropped after the RBA said it was considering lowering rates in November, but then scaled higher over night to be trading near 68.3 US cents this morning.
Commodities: Oil prices fell sharply on concerns over excess global supply. Meanwhile, gold prices rose.
Global: With the US and China continuing to negotiate a phase-one trade deal, debate is reported to involve tariff rollbacks and the scale in which this would occur. It reflects Chinese demands that all tariffs after May, after initial talks broke down, to be removed immediately and that the tariffs imposed before May to be lifted gradually.
Australia: The November minutes of the RBA board meeting show that the decision to keep rates on hold at 0.75% was much closer than the market was expecting. Interest rates have already been cut 3 times so far in 2019 in response to slowing growth and underlying inflation falling short of the RBA’s 2-3% target band.
The minutes retained the commitment to “ease monetary policy further if needed”, but recognised that lower interest rates could be having negative effects. These were highlighted as adverse effects on savers’ incomes and on consumer confidence.
There was no mention of unconventional monetary policy, however as interest rates approach their effective lower bound (ELB), it is likely that alternative policies will need to be deployed. The minutes stressed that the usual transmission channels (lower exchange rate, higher asset prices and lower borrowing costs) were working.
The November minutes retain a clear easing bias, but reiterate the RBA’s belief that existing cuts are having an impact and that a “gentle turning point” has been reached in the economy. The close call in November and soft employment data last week suggest further easing is likely. We continue to expect a further 25 basis points cut to the cash rate in February next year.
United States: Housing starts lifted 3.8% in October, the second increase in six months. It provides an early sign of stabilising in the housing market in response to lower mortgage rates. A 5.0% lift in building permits to their highest since 2007 further underscores an improvement in home building.
New York Federal Reserve President John Williams reiterated that interest rates were at the appropriate level but was watching for downside risks given inflation below target and a weak global growth outlook.
Today’s key data and events:
AU Westpac Leading Index Oct prev -0.08% (10:30am)
JN Terms of Trade Oct (10:50am)
- Trade Balance exp ¥229.3bn prev ¥123.0bn
- Exports y/y exp -7.5% prev -5.2%
- Imports y/y exp -15.2% prev -1.5%
AU Skilled Vacancies Oct prev -0.7% (11am)
CH 1-Year Loan Prime Rate Nov exp 4.20% prev 4.20% (12:30pm)
CH 5-Year Loan Prime Rate Nov exp 4.85% prev 4.85% (12:30pm)
EZ ECB Publishes Financial Stability Review (8pm)
US FOMC Meeting Minutes Oct (6am)
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