Bank of Melbourne

Morning Report

Main Themes: Asset markets continued to be impacted by ongoing coronavirus fears. WHO declared a public health emergency of international concern but also commended China’s efforts to contain the disease and said travel and trade restrictions were not necessary.
Share

Main Themes: Asset markets continued to be impacted by ongoing coronavirus fears. WHO declared a public health emergency of international concern but also commended China’s efforts to contain the disease and said travel and trade restrictions were not necessary.

Share Markets: US share markets slumped on renewed coronavirus fears, but later regained ground to finish modestly firmer. Share markets erased losses after WHO said travel and trade restrictions were not necessary, removing at least temporarily a threat to the global economy. At the close, the Dow Jones was up 125 points (or +0.4%) and the S&P 500 index was 9 points higher (or +0.3%).

Amazon reported earnings after the share market close. Amid competition from Microsoft and Google, Amazon Web Services last quarter posted the weakest year-over-year revenue growth since Amazon began breaking out sales. Some analysts are warning that slowing growth and rising costs at its cloud business may hurt earnings. The cloud business is the company's most profitable division.

Interest Rates: US 2-year and 10-year bond yields fell during the overnight session to fresh four-month lows, but later recovered ground. At the close, both US 2-year and 10-year bond yields were unchanged from the previous session’s close.

Interest-rate markets are pricing little chance of easing at the next Federal Reserve decision on March 18. Markets have a terminal rate of 1.10% (versus the Fed’s current mid-rate of 1.63%).

The Australian 3-year government bond yield fell from 0.63% to 0.60% and the Australian 10-year yield dropped from 0.98% to 0.94%. Interest-rate markets are pricing only a 15% chance of easing at next week’s RBA board meeting, but a terminal cash  rate of 0.37% (versus the current cash rate of 0.75%).

Foreign Exchange: The Australian dollar fell to an overnight low of 0.6700 against the US dollar before appreciating late in the New York session to currently trade around the 0.6720 handle. The overnight low was the weakest exchange rate since 2 October 2019 and reflects the falls in commodity prices and worries about the Chinese economic outlook due to the coronavirus.

The AUD can trade as a proxy for global risk sentiment. So it will continue to be buffeted by coronavirus concerns. There is support for the AUD/USD at 0.6700, but the AUD/USD could try to retest breaking under this level in the short term if coronavirus concerns continue to mount.

Commodities: Oil fell overnight and spiralled toward its worst monthly performance since May 2019 on growing alarm that the coronavirus outbreak is crippling fuel demand. It has prompted OPEC to consider moving its March meeting to next month, although OPEC ally Russia was said to be resistant.

Australia: Export prices fell 5.2% in Q4, as iron ore  and mineral fuels retreated. Meanwhile, import prices picked up 0.4% in the same period amid moderate demand. Australia posted two consecutive quarters of current account surpluses in Q2 and Q3, which is the first back-to-back surplus in 44 years. The decline in commodity prices in Q4 suggests that this surplus will come under pressure in the coming quarters.

United Kingdom: The Bank of England (BOE) stood pat in BOE Governor Mark Carney's final meeting. Officials voted 7-2 to keep the key rate unchanged at 0.75%, belying investor expectations that the decision was on a knife-edge. But the BOE signalled easing may be needed soon, cutting GDP forecasts and predicting inflation will only return to target by the end of 2021. Interest-rate markets are now pricing a rate cut late this year.

China: WHO has now declared a public health emergency of international concern. The WHO finally made the call which allows it to help begin coordinating government responses. The decision comes as the number of confirmed cases climbed to 8,144 worldwide with 170 deaths, as India and the Philippines reported their first infections.

Some analysts are suggesting China’s GDP could sink to as low as 4.5% in the year ending this March quarter, down from annual growth of 6.0% in the December quarter.

The first signs of the hit from the coronavirus outbreak may come in China's January purchasing managers’ index (PMI) data later today. Consensus is for the factory index to have dropped to 50, balanced between growth and contraction, from 50.2 in December. The non-manufacturing PMI measure may also decline.

Europe: Four confidence measures were published overnight for the euro area for January. These confidence measures that spanned economic, industrial, business and services improved over the month from December. The final measure for January’s consumer confidence was also published and it remained unchanged.

In other data, the euro area’s unemployment rate improved from 7.5% in November to 7.4% in December. The unemployment rate is edging closer to the pre-GFC lows of 7.3%.

United States: The US economy grew an annualised rate of 2.1% in the fourth quarter, the same as the prior period, but consumer spending moderated and business investment continued to deteriorate. Market consensus was for an outcome of 2%. Household spending slowed to a 1.8% pace and investment declined for a third quarter in a row.

The Federal Reserve's preferred inflation measure, the core personal consumption expenditure (PCE) index, rose at an annualised pace of 1.3%.

 

Today's key data and events:

NZ ANZ Consumer Confidence Jan prev 123.3 (8am)

JN Jobless Rate Dec exp 2.3% prev 2.2% (10:30am)

JN Retail Sales Dec exp 1.0% prev 4.5% (10:50am)

JN Industrial Production Dec exp 0.7% prev -1.0% (10:50am)

AU PPI Q4 prev 0.4% (11:30am)

AU Private Sector Credit Dec exp 0.2% prev 0.1% (11:30am)

CH Mfg PMI Jan exp 50.0 prev 50.2 (12pm)

CH Non-Mfg PMI Jan exp 53.0 prev 53.5 (12pm)

JN Housing Starts Dec y/y exp -11.8% prev -12.7% (4pm)

EZ GDP Q4 exp 0.2% prev 0.2% (9pm)

EZ CPI Core Jan y/y exp 1.2% prev 1.3% (9pm)

US Personal Income Dec exp 0.3% prev 0.5% (12:30am)

US Personal Spending Dec exp 0.3% prev 0.4% (12:30am)

US PCE Core Deflator Dec exp 0.1% prev 0.1% (12:30am)

US MNI Chicago PMI Jan exp 49.0 prev 48.9 (1:45am)

US UoM Consumer Sentiment Jan exp 99.1 prev 99.1 (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