Bank of Melbourne

Morning Report

Main Themes: Investor sentiment remained cautious, as the new coronavirus spread further. Equities and commodities fell overnight, as investors shunned riskier asset classes.



Main Themes:Investor sentiment remained cautious, as the new coronavirus spread further. Equities and commodities fell overnight, as investors shunned riskier asset classes.

Share Markets: US share markets extended a global sell off on growing concerns over the spread of China’s deadly coronavirus and its economic impact. At the time of writing, the Dow Jones was down 392 points (or -1.4%) and the S&P 500 index was 46 points weaker (or -1.4%). Tomorrow the earnings deluge in the US begins in earnest.

We expect the Australian share market to also be hurt by worries about the coronavirus and what its impact might be on the world’s second largest economy.

Interest Rates: US Treasury bond yields fell across the curve, as the safe-haven appeal of bonds pushed bond prices higher. The US 2-year bond yield fell 5 basis points to a 4-month low of 1.44%. The US 10-year bond yield dropped 8 basis points to a 4-month low of 1.60%.

The US Federal Reserve Open Market Committee (FOMC) meets to decide policy later this week. We are not expecting any change to policy settings. Financial markets are also priced for no change from the FOMC.

Australian 3-year government bond yields fell from 0.71% to 0.64% and Australian 10-year yields declined from 1.04% to 0.98%. Interest-rate markets are pricing only a 25% chance of easing at the RBA’s board meeting next week.

Foreign Exchange: The flight to safety pushed the USD index higher overnight. Downbeat German IFO numbers also revived selling interest in the euro with EUR/USD hitting a new session low overnight of 1.1017.

The stronger USD and weaker commodity prices caused the AUD/USD exchange rate to fall from an overnight high of 0.6820 to a 3½-month low of 0.6752 (lowest since 16 October 2019). The NZD/USD was also depreciated overnight.

The downbeat German IFO numbers revived selling interest in the euro, knocking EUR/USD to a new session low of 1.1017. The spot remains vulnerable, as the safe-haven appeal of the US dollar remains underpinned amid growing concerns over the China coronavirus outbreak.

Commodities: Oil tumbled to the lowest in more than three months as investors worry about the economic impact on China and worldwide energy demand. However, traders took some comfort from the Saudi Arabian assurances that the world’s biggest crude exporter is closely monitoring the situation and its impact on oil markets.

Meanwhile, safe-haven flows pushed the price of gold to its highest level since April 2013.

Australia: There was no major economic data on Friday or yesterday. We published a note on the cash rate outlook. We continue to expect more rate cuts this year. However, we no longer see the next rate cut coming as soon as next month. We now expect the RBA to wait until April to next cut the cash rate.

One of the main reasons for pushing out the timing of this rate-cut call is because the RBA has placed importance on the performance of the labour market in pulling the cash-rate lever. Yesterday, data showed another strong outturn in jobs growth and another drop in the unemployment rate. Other key partial economic indicators since the start of this year have printed above expectations also.

We expect the RBA will stand pat and assess incoming data. This incoming data should over the next few months still leave the RBA needing to tap on the accelerator.

We do not think the current trends around the labour market will be sustainable. We are expecting the unemployment rate to drift higher over this year. By April, the RBA should start to see evidence of this drift higher.

More importantly, the central goal of the RBA in keeping the inflation rate within a band of 2-3 per cent per annum over time is unlikely to be met any time soon. The next inflation report is scheduled for release on January 29 and we expect the annual underlying rate to hold at a soggy pace of 1.4%. Wages growth is also likely to stay soft through 2020.

China: China’s death toll from the new coronavirus has climbed as the infection has spread. Fatalities in China have risen to 80, up from just 2 a week ago and the mainland has 2,744 confirmed cases with more than 30,000 people under observation. The disease has also spread outside of China. In Australia, there are now 5 confirmed cases.

Europe: The headline German IFO business climate index came in at 95.9 in January, weaker than last month’s 96.3 and missing the consensus estimates pointing to a reading of 97.0.

United States: New home sales fell 0.4% to an annualised rate of 694,000 in December, from an annualised rate of 697,000 in November. The December outcome was worse than financial markets expected. However, new home sales can be volatile month to month and while December sales disappointed, the December quarter was still solid. Moreover, on a year ago, new home sales are up more than 20% on the back of low housing inventory, low mortgage rates and strong jobs growth.

The Dallas Federal Reserve’s manufacturing survey showed perceptions of broader business conditions were largely unchanged in January. The general business activity index came in at zero for the month. Expectations regarding future business conditions were slightly more optimistic in January.


Today's key data and events:

AU NAB Business Survey Dec (11:30am)

   Conditions Index prev 4

   Confidence Index prev 0

UK CBI Survey Jan (10pm)

US Dur. Goods Orders Dec exp 0.4% prev -2.1% (12:30pm)

US CB Consumer Confidence Jan exp 128 prev 126.5 (1am)

US CoreLogic House Price Index Nov prev 212.43 (1am)

US Richmond Fed Mfg Index Jan exp -3 prev -5 (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