Main Themes: Trade developments once again dominated. This time, news reports were positive, suggesting that the US and China phase-one trade deal is on. The boost to sentiment drove US shares and bond yields higher. However, the US dollar weakened on softer US economic data.
Share Markets: The overnight session was a sea of green. Improved hopes of a deal snapped a three-day losing streak in US markets. The Dow, S&P500 and the Nasdaq were all higher.
Interest Rates: The improvement in risk appetite dampened demand for treasuries. The US 10-year yield rose 6 basis points to 1.77%, appearing to have little reaction to the softer run of economic data.
Foreign Exchange: The US dollar index fell around the weak ADP jobs report, but then retraced losses later on. Sterling jumped to as high as US$1.31, its strongest in seven months on expectations that the Conservatives will win an outright majority in the election next week. The Australian dollar dipped as GDP growth missed expectations yesterday, but the combination of a weaker US dollar and better trade news saw AUD climb back overnight to be little changed over the session.
Commodities: Oil prices jumped on expectations that OPEC would cut crude production further. A drop in US crude stockpiles was also supportive.
Global: A news report indicated that the US and China was expected to be completed before December 15, when US tariffs on Chinese imports were set to rise. The source said that recent comments by Trump which suggested a deal might need to wait after the 2020 US presidential election, should not be interpreted to mean that talks were stalling. Moreover, the recent US legislation to sanction Chinese officials over human rights issues were unlikely to impact the talks. Key issues left to negotiate included how to guarantee the Chinese purchase of agricultural products and which tariffs would be rolled back. US President Trump also said that the talks were going “very well”.
Australia: Economic activity has been languishing since the middle of last year and the “gentle turning point” the Reserve Bank has been expecting for growth does not seem to have materialised yet. The economy appears stuck in a low gear of activity. GDP in the September quarter expanded by 0.4%, the slowest quarterly pace in three quarters and also below market expectations. Annual growth was 1.7% in the September quarter, only marginally higher than the revised 1.6% outcome for the June quarter. The major source of disappointment in the national accounts came from household consumption, which grew just 0.1% in the September quarter. It is the weakest quarterly rate since the final quarter of 2008. Importantly, three rate cuts from the Reserve Bank this year and the government’s tax rebates have failed to revive consumer spending. That said, household incomes did receive a boost suggesting consumers bolstered their balance sheets. New business investment remained in the ICU ward, led by declines in new engineering construction and machinery & equipment. Net exports and the government sector continued to be the major propellers of growth.
China: The Caixin services PMI improved in November, rising from 51.1 in October to 53.5. It was the highest in seven months, adding to signs that Chinese economic activity has picked up in the month. It follows an improvement in the manufacturing indicator over the weekend.
Europe: The Euro zone’s Markit services PMI was revised up from 51.5 to 51.9 in the final estimate for November, but still below the 52.2 reading in October.
United Kingdom: The Markit/CIPS services PMI was also revised upwards from 48.6 to 49.3 in the final estimate for November, remaining just below 50, the dividing line between expansion and contraction. While the index has stabilised, its level points to subdued activity in services.
United States: ADP private payrolls rose just 67k in November, well below the consensus estimate of 135k. The weakening in business activity as suggested in surveys may be now translating into softer employment.
The ISM non-manufacturing index weakened from 54.7 in October to 53.9 in November. It was below the median expectation of 54.5. The weakness was due a decline in business activity, while new orders and employment were stronger. On average the index remains well down from levels earlier in the year and last year and is continuing to suggest a moderation in activity, but the index is holding above 50, unlike its counterpart for manufacturing. The services sector continues to be holding up and preventing a more pronounced slowdown in the US economy. The Markit services PMI is also suggesting weaker activity than early this year and last year, but confirmed an improvement in November from 50.6 to 51.6 in the final reading.
Today's key data and events:
NZ Volume of All Buildings Q3 exp 1.0% prev -1.5% (8:45am)
AU Trade Oct exp $6500mn prev $7180mn (11:30am)
AU Retail Sales Oct exp 0.3% prev 0.2% (11:30am)
EZ Retail Sales Oct exp -0.5% prev 0.1% (9pm)
EZ GDP Q3 Final exp 0.2% prev 0.2%
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