Main Themes: Financial markets fretted overnight that phase-one of a US-China trade deal may be delayed further. A risk-averse mood among investors prevailed as a result with share markets finishing lower and US government bond yields sliding.
Share Markets: US share market indexes finished in the red, led by telecommunication and automaker stocks. The Dow Jones dropped 113 points (or -0.4%) and the S&P 5090 index sank 12 points (or -0.4%).
Interest Rates: US 2-year treasury yields continued to probe yesterday afternoon’s low of 1.56%, before closing 2 basis points weaker at 1.58%. US 10-year yields probed 1.73% overnight and closed 4 basis points lower at 1.74%.
Interest-rate markets are pricing only a 5% chance of easing at the Federal Reserve’s December meeting and a terminal rate of 1.18% in 2020 (vs 1.63% currently).
Australian 3-year government bond yields fell from 0.73% to 0.71%. Australian 10-year yields ranged between 1.09% and a one-month low of 1.05%. Interest-rate markets are pricing a 25% chance of easing at the RBA’s December meeting and a terminal rate of 0.46% next year.
Foreign Exchange: The US dollar rose modestly against a basket of major currencies overnight. EUR/USD ranged between 1.1055 and 1.1080. USD/JPY ranged between 108.35 and 108.75, as the defensive yen outperformed. The underperformer was the Australian dollar, as investors’ appetite for risk waned. The AUD/USD exchange rate fell from a high of 0.6835 to a low of 0.6785 overnight. Despite the decline, the AUD/USD remains within a comfortable trading range of 0.6700-0.6900; it has broadly maintained this tight range since late July.
Commodities: Oil jumped as American crude stockpiles rose less than markets expected and inventories at a key storage hub shrank by the most since August.
Australia: The Westpac leading index improved slightly in October, declining 0.07% after a 0.12% fall in the previous month. However, the index is continuing to point to an economy running below trend, suggesting that a weak pace of economic growth will persist well into 2020.
Skilled vacancies fell 0.9% in October, the tenth consecutive month of decline. It provides further evidence of softening labour market conditions under the weight of soft economic growth.
Japan: The annual decline in exports and imports worsened in October. Exports were down 9.2% in the year, the largest decline in three years. Weakening global demand and trade tensions were largely to blame, as well as last month’s typhoon. Imports were also weak, falling by 14.8% in the year, also the largest annual decline in three years. Japan is also facing a headwind from a sales-tax hike which took effect October 1.
United States: The minutes of the Federal Open Market Committee (FOMC) meeting on October 30 were published overnight. At this meeting, the FOMC cut the federal funds target rate by 25 basis points, taking it to a midpoint of 1.625%.
The minutes confirmed that most FOMC members saw an ensuing on-hold stance as appropriate (absent any material surprises). Most members saw downside risks as elevated and that the rate cut was justified by low inflation. Several members were worried inflation expectations could slide further. The FOMC also debated, but didn’t decide, whether to have a standing repo facility.
FOMC member Brainard, speaking to CNBC, said the Fed had taken insurance against the risks of a trade conflict. Brainard’s seen some slowing in growth, but no more than expected, with trade uncertainty a major factor, while the consumer remains resilient. Her stance could be described as “wait and watch”. That said, Brainard saw the balance of risks tilted to the downside, including from international trade and global growth.
Reuters reported that a phase-one deal with China may not happen this year, citing unnamed sources close to the negotiations. US President Trump and Treasury Secretary Steven Mnuchin said in an October 11 news conference that an initial trade deal could take as long as five weeks to ink. Just over five weeks later, a deal is still elusive and negotiations may be getting more complicated.
Today’s key data and events:
EZ Consumer Confidence Nov (2.00am)
NZ Credit Card Spending Oct prev -0.1% (1.00pm)
UK Public Sector Borrowing Oct exp £8.6bn prev £8.7bn (8.30pm)
US Philadelphia Fed Index Nov exp 6.0 prev 5.6 (12.30am)
US Leading Index Oct exp -0.2% prev -0.1% (2.00am)
US Existing Home Sales Oct exp 2.0% prev -2.2% (2.00am)
US Fed President Mester speaks (12.30am)
US Fed President Kashkari speaks (2.10am)
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