Bank of Melbourne

Morning Report

Main Themes: Investor sentiment deteriorated overnight after comments from US President Trump and US Commerce Secretary Wilbur Ross suggested a US-China trade deal would be delayed again.

Main Themes: Investor sentiment deteriorated overnight after comments from US President Trump and US Commerce Secretary Wilbur Ross suggested a US-China trade deal would be delayed again.

Share Markets: Pessimistic remarks on trade from US President Trump and Commerce Secretary Wilbur Ross sent share markets reeling overnight. The Dow Jones fell 280 points (or -1.0%) and the S&P 500 index sunk 21 points (or -0.7%).

Interest Rates: US 2-year treasury yields fell 6 basis points to 1.51% and US 10-year yields declined 11 basis points, as investors fled to safer-haven assets. Interest-rate markets are pricing a near-zero chance of easing at this month’s Federal Reserve meeting.

Australian 3-year government bond yields, which rose from 0.71% to 0.78% in response to the RBA decision, later fell to 0.68% in response to the deterioration in global sentiment. Australian 10-year yields similarly fell from 1.20% to 1.06%. Interest-rate markets are pricing a 55% chance of easing at the RBA’s February meeting and a terminal rate of 0.38%.

Foreign Exchange: The Australian dollar lifted from near 0.6820 against the US dollar to 0.6840 in the immediate aftermath of the RBA decision yesterday to leave the cash rate unchanged. The tone of the statement also likely encouraged a more bid tone to flow through to the AUD/USD pair. Overnight, the AUD/USD extended its rally to reach a high of 0.6862, before the gains petered out and the exchange rate is now consolidating at around 0.6840-0.6850 ahead of GDP data later today.

Commodities: OPEC and other major oil producers are poised for a debate about lax implementation of oil-production cuts in Vienna this week. Russia is set to discuss a rule change that would exclude some of its oil production from the group’s quota.

Australia: The Reserve Bank (RBA) left the cash rate on hold yesterday at 0.75%, as widely expected by financial markets and economists. The RBA’s accompanying statement made it clear the RBA is biding its time due to the “long and variable lags in the transmission of monetary policy”.

The overall tone in the statement was slightly more positive. The RBA is more optimistic on the global economy, on financial market sentiment and on established housing markets. However, the exception is the tone on the labour market.

The RBA omitted from the previous statement its characterisation that employment has continued to grow strongly, perhaps highlighting that they are less assured about jobs growth continuing.

Other data showed that Australia recorded its second consecutive quarterly surplus in the September quarter, the first back-to-back surpluses recorded since 1973. The current account surplus rose to a record $7.9 billion, spurred by favourable iron ore prices, particularly early in the quarter.

Persistent current account surpluses are not expected to become the new normal though, given that iron ore prices have fallen 30% from their July peak and are not expected to return to those levels in the near future.

The terms of trade improved further in the September quarter, edging up by 0.4%. The terms of trade has improved for five straight quarters and is now 7.8% more favourable than a year ago.

Export volumes rose 0.7% over the quarter, while imports fell 0.2%. The outperformance of exports indicates that net exports will add 0.2 percentage points to gross domestic product (GDP), which is due to be released later today.

Meanwhile, government spending registered another solid increase in the September quarter. Government consumption rose 0.9% in the September quarter while government investment increased 1.9%, suggesting a modest contribution to GDP growth by government spending.

United States: US President Trump signalled he would be willing to wait for another year before striking a trade agreement with China. Trump and US Commerce Secretary Ross said that while they were optimistic about the talks, the December 15 tariffs would be imposed if nothing were to change. Trump also suggested using tariffs against Germany if they were not to meet their financial commitments to NATO.


Today’s key data and events:

AU AiG Perf of Services Index Nov prev 54.2 (8:30am)

AU National Accounts Q3 (11:30am)

   GDP Q3 q/q exp 0.6% prev 0.5%

AU GDP Q3 y/y exp 1.8% prev 1.4%

CH Caixin Services PMI Nov exp 51.2 prev 51.1 (12:45pm)

EZ Markit Services PMI Nov F exp 51.5 prev 51.5 (8pm)

UK Markit/CIPS Services PMI Nov F exp 48.6 prev 48.6 (8:30pm)

US ADP Employment Nov exp 140k prev 125k (12:15am)

US Markit Services PMI Nov F exp 51.6 prev 51.6 (1:45am)

US ISM Non-Manufacturing Index Nov exp 54.5 prev 54.7 (2am)


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