Bank of Melbourne

Morning Report

Main Themes: Markets were roiled overnight by weak US manufacturing data and fresh tariffs. Equities fell and bond yields rose as US economic data was worse than expected and President Trump tweeted that he would restore tariffs on steel imported from Brazil and Argentina.

Main Themes: Markets were roiled overnight by weak US manufacturing data and fresh tariffs. Equities fell and bond yields rose as US economic data was worse than expected and President Trump tweeted that he would restore tariffs on steel imported from Brazil and Argentina.   

Share Markets: Global equity bourses fell sharply as weak US manufacturing data and renewed trade worries dampened sentiment. The biggest declines were felt in Europe, where the trade worries were felt most acutely. The Euro Stoxx 50 fell 2.1% while the German DAX and French CAC 40 both fell more than 2%.

In the US, the Dow Jones fell 0.9% while the S&P500 dropped 0.8%.

Interest Rates: The US yield curve steepened as economic data injected a note of caution around the momentum of the economy. The 10-year treasury yield rose 5 basis points to 1.83% while the 3-month bill fell 1 basis point to 1.57%.

The Australian curve was also steeper, with the 10-year bond currently yielding 1.10% and the 90 day bank bill swap yield unchanged at 0.89%.

Foreign Exchange: The US dollar fell to a two-week low following weaker-than-expected economic data, boosting the chances of further monetary easing. Before the weak US economic data, strong data from China’s manufacturing sector was setting a positive tone for currency markets. The strong economic data out of China boosted the AUD to 0.6823, reversing a string of recent declines.

Commodities: Oil prices jumped as speculation rose that OPEC+ (which includes Russia among other oil producers) was cutting production following a surprise fall in OPEC output in November. Concerns over trade tensions subsequently tempered some of those gains. WTI futures are currently US$56.0 per barrel.

New Zealand: The terms of trade improved in Q3, with the overall level reaching the highest since 2017. The terms of trade rose 1.9% over the quarter in Q3, compared with a 1.4% rise in Q2. Export volumes fell 4.6% over the quarter while import volumes rose 1.1%.

Australia: There was a raft of economic data released yesterday. The general theme was that although house prices have recovered quickly and strongly, construction activity remains weak while companies continue to face difficult operating conditions.

CoreLogic data showed national dwelling prices lifted by 1.7% in November, which is the fifth straight month of gains. Across the capital cities, the rise was 1.9% in the month. For the first time since April 2018, the annual pace of change is positive (at 0.1%). Dwelling prices in November rose the fastest in Sydney at 2.7%, which was the firmest monthly growth rate since May 2015, and the sixth consecutive month of growth. The increase was led by houses.

Housing turnover remains incredibly low across Australia and especially in Sydney and Melbourne. The low stock levels could see prices bid up not just on low interest rates but because more buyers are chasing low levels of stock. Indeed, nationally, monthly turnover is 45.4% below its 20-year average.

Despite the established recovery in housing prices, residential building approvals declined 8.1% in October, more than retracing a 7.2% increase in September. The sizeable decline is continuing to point to a downward trend and suggests that residential construction is set to remain weak. Demand remains hindered by the concerns over building quality. While the lift in dwelling prices and lower official interest rates should eventually provide support to residential building, we do not expect a sustained recovery anytime soon.

Meanwhile, other data showed that gross company operating profits contracted by 0.8% in the September quarter. It was the first negative outturn since June 2017.

The mining sector’s contribution to profits turned negative in the September quarter. Profits in the sector fell 2.1%. The fall was due to retreating commodity prices, which had surged in the previous quarter, leading to a 10.5% surge in mining sector profits. Excluding the negative contribution from mining, non-mining profits softened. Non-mining profits expanded just 0.1%.

Wages & salaries increased 1.0% in the September quarter following a revised 1.6% rise in the three months to June.

Inventories fell 0.4% in the September quarter following a 1.0% fall in June. Companies appear to be destocking following a prolonged period of inventory build that spanned from September 2017 to December 2018.

China: Chinese manufacturing firms showed signs of resilience in November, according to the Caixin manufacturing PMI. The index rose to 51.8 in November from 51.7 in October, its highest since 2017. The government has introduced several piecemeal stimulus measures in an effort to stoke domestic demand amid slowing global growth and growing trade tensions with the US. Underlying components showed that there was still some pressure on firms. The new orders component fell, as did new export orders.

Europe: The final reading of the November Markit manufacturing PMI rose slightly to 46.9 from 46.6 previously. The survey remains in contractionary territory, led by weakness in the German manufacturing sector.

United States: A manufacturing survey compiled by the Institute of Supply Management (ISM) showed that manufacturing activity probably contracted in November. The ISM factory index fell to slightly to 48.1 in November, registering its fourth consecutive month below the 50 neutral level. The weaker-than-expected reading injects a note of caution around US economic prospects. Before the latest disappointment, recent economic data out of the US had been largely beating expectations.

Earlier, President Donald Trump tweeted that tariffs on steel and aluminium imported from Brazil and Argentina would be restored, effective immediately.

Elsewhere, estimates for retail spending over the Thanksgiving holiday were strong. Cyber Monday sales are on course to total a record US$9.4 billion, building on solid Black Friday turnover. Earlier-than-usual promotions and free shipping have boosted consumer interest this year.

Today’s key data and events:

AU Balance of Payments Q3 (11:30am)

   - Current Account Surplus exp $5.0bn prev $5.9bn

   - Net Exports Contribution to GDP exp 0.2% prev 0.6%

AU RBA Cash Rate Decision exp 0.75% prev 0.75%

UK Markit/CIPS Construction PMI Nov exp 44.5 prev 44.2

EZ PPI Oct exp 0.0% prev 0.1% (9pm)

NZ QV House Prices Nov prev 2.8% (3am)


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.


Nelson Aston, Economist  Ph: 02-8254-1316