Bank of Melbourne

Morning Report

Main Themes: A positive mood in financial markets continued. While there were no major new developments on trade last night, investors remain hopeful of a deal between the US and China. Positive US economic data was supportive of sentiment. US share markets rose to new record highs.
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Main Themes: A positive mood in financial markets continued. While there were no major new developments on trade last night, investors remain hopeful of a deal between the US and China. Positive US economic data was supportive of sentiment. US share markets rose to new record highs. 

Share Markets: Share markets remained upbeat. The Dow, S&P500 and the Nasdaq climbed to new record highs.

Interest rates: The boost to sentiment drove US yields higher. The 10-year yield lifted 3 basis points to 1.78%. Yields on 2-year notes also lifted, rising 4 basis points to 1.62%.

Foreign Exchange: The US dollar index edged higher upon the stronger-than-expected GDP revision and durable goods orders release. Sterling gained, but will remain volatile before Britain’s election due o take place December 12. The Australian dollar was down slightly, reflecting the stronger US dollar. Investors are also continuing to digest comments from RBA Governor Lowe on Tuesday night, which suggested interest rates could fall further than previously thought. 

Commodities: Oil prices fell after an unexpected lift in crude inventories.  The Energy Information Administration (EIA) also estimated that crude production would rise to a record. Gold prices also fell in step with the boost to risk appetite.

Australia: Construction activity fell by -0.4% in Q3 to be 7% lower over the year. A rebound in public works largely offset a drop in private construction activity.

We published a note yesterday that gave an update of our view for policy over the rest of 2019 and next year. We expect the RBA to cut the cash rate twice next year by 25 basis points each – in February (our long-held view) and now also in June. Moreover, we also see a risk that the RBA will need to deploy quantitative easing in the second half of next year, taking the form of government-bond buying.

China: Profits at Chinese industrial enterprises fell by 9.9% in the year to October, from an annual rate of 5.3% in September. It is the third consecutive monthly fall and is also the biggest fall since at least 2011. Profits are being hurt by falling producer prices and slowing domestic demand.

United States: GDP was upgraded from 1.9% to 2.1% in the September quarter. The revision reflected a build-up of inventories and a minor upward revision in consumer spending. The underlying story of softer momentum throughout the middle of this year remains unchanged. However, it highlights how the ongoing resilience in consumer spending is providing key support despite trade tensions.

A less promising sign for the consumer spending outlook was the deceleration in income growth. Personal incomes were flat in October, the weakest result in over a year. Personal spending was however, in line with expectations at 0.3% growth, suggesting recent resilience in the consumer is being maintained over the near term.

Durable goods orders unexpectedly rose, lifting 0.6% in October. The more positive developments regarding the US-China trade conflict is perhaps already having a positive impact on business spending.  A further positive signal was the strength in core orders. Non-defense capital goods orders grew 1.2%, which was the strongest increase since January.

 

Today’s key data and events:

AU Private Capital Expenditure Q3 exp -0.5% prev -0.5% (11:30am)

UK Nationwide House Prices Nov exp 0.1% prev 0.2% (6pm)

EZ Economic, Business Climate, Industrial, Services & Consumer Confidence Indexes Nov (9pm)

 

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