Bank of Melbourne

Morning Report

Main Themes: The key highlight was the Federal Reserve’s rate decision. While there were few surprises, the cautious optimism from Fed Chair Powell sparked a modestly dovish reaction from markets. Shares were higher, while bond yields and the US dollar fell.
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Main Themes: The key highlight was the Federal Reserve’s rate decision. While there were few surprises, the cautious optimism from Fed Chair Powell sparked a modestly dovish reaction from markets. Shares were higher, while bond yields and the US dollar fell.

Share Markets: Share markets lifted on the prospect that interest rates were likely to remain low for some time. The Dow rose 0.1% and the S&P500 lifted 0.3%.

Interest Rates: Yields on US treasuries fell, as the Federal Reserve signalled little change in rates for some time. US 10-year yields fell 5 basis points to 1.79%.

Foreign Exchange: The US dollar index fell after the Federal Reserve’s comments that interest rates were likely to remain low for some time. GBP regained the previous session’s losses after a poll showed some doubt over whether the Conservative’s can win a majority in today’s election. The Australian dollar climbed higher, supported by the more favourable risk environment, and the weaker US dollar.

Commodities: Oil prices fell after an unexpected build in US crude inventories. Gold prices rose on the Fed’s accommodative stance, moving inversely with the US dollar.

Australia: Consumer confidence continued to fall in December. The Westpac-MI consumer sentiment index fell 2.0% to 95.1 in December. It has now been below the 100 neutral level for six consecutive months and is down 8.9% over the year.

Consumer confidence has reacted negatively to rate cuts from the Reserve Bank (RBA).  This suggests that consumers are focussing on the negative outlook for economic growth, and appear to have been spooked by the ultra-low level of interest rates.

United States: The Federal Reserve left policy rates unchanged as widely expected at a range of 1.50-1.75%. The key message in the accompanying commentary was that monetary policy was to remain unchanged for some time. In the Fed’s official forecasts, the median of policymakers saw no change in rates for all of 2020. In the accompanying press conference, Fed Chair Powell said that the economic outlook remained “a favorable one, despite global developments and ongoing risks”. An omission of “uncertainties” about the outlook was notable in the accompanying statement. The likelihood of a “phase-one” trade deal and the resilience of the labour market have pointed to near-term prospects improving. Powell was still cautious in regards to the outlook, and particularly in regards to inflation. Powell added that if there was a “material reassessment of our outlook, we would respond accordingly”. We see that the risks continue to be towards a cut rather than a hike given softer growth in the US economy, ongoing signs of weakness in the global economy and as uncertainty over trade developments are likely to linger.

Headline inflation was a touch above expectations. CPI rose 0.3% in November, for an annual rate of 2.1% (versus the median estimate of 2.0%). The pick up reflected higher gasoline prices. Core inflation (excluding food and energy) was as expected at an annual rate of 2.3%.

 

Today's key data and events:

NZ Food Prices Nov prev -0.3% (8:45am)

JN Core Machine Orders Oct exp 0.5% prev -2.9% (10:50am)

AU MI Consumer Inflation Expectations Dec prev 4.0% (11:00am)

EZ ECB Monetary Policy Meeting prev 0.0% (11:45pm)

UK General Election Dec 12

US PPI Final Demand Nov exp 0.2% prev 0.4% (12:30am)

US Initial Jobless Claims Dec 7 exp 214k prev 203k (12:30am)

 

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