Bank of Melbourne

Morning Report

Main Themes: The announcement of Chinese stimulus measures to offset the impact of the coronavirus spread had a calming effect on markets overnight. The US ISM manufacturing survey was stronger than expected. Equities rebounded, but investors remained cautious in other asset markets.
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Main Themes: The announcement of Chinese stimulus measures to offset the impact of the coronavirus spread had a calming effect on markets overnight. The US ISM manufacturing survey was stronger than expected. Equities rebounded, but investors remained cautious in other asset markets.

Share Markets: Equity markets have been whipsawed by developments in the new coronavirus. In its first session since before the Lunar New Year holiday (January 23), the Shanghai-Shenzhen CSI 300 index fell 7.9% as investors took the opportunity to assess the impact on local share prices. The announcement of a slew of stimulus measures by the Chinese authorities alleviated some concern in other markets. The S&P500 and Dow Jones are up 0.8%. A stronger-than-expected reading of the ISM manufacturing survey also boosted US equities.

Interest Rates: Bond yields were supported by Chinese stimulus measures and positive US economic data. US 10-year treasury yields ended the session 1 basis points higher at 1.52%, paring some gains after rising as high as 1.57% earlier.

Australian recovered steadily over the session, but remained lower. The 3-year bond yield fell 3 basis points to 0.59% and the 10-year yield is down 3 basis points to 0.93%. Markets are pricing in a 20% chance of a cut at today’s RBA meeting.

Foreign Exchange: Stronger-than-expected US economic data and abated concerns over the impact of the coronavirus supported the US dollar overnight, but investors remain cautious. The US dollar index marched higher overnight, closing up 0.5%.

A round of staunch rhetoric from UK Prime Minister Boris Johnson and EU negotiators regarding a UK-EU trade deal left the pound 1.5% lower, edging below US$1.30. The EU and the UK have until the end of the year to come to an agreement before the Brexit transition period is over. The euro fell 0.3% against the US dollar to US$1.1058.

Commodities: Oil prices slumped to the lowest in more than a year as reports emerged that China’s demand for oil could fall up to 20% due to the coronavirus. In response, OPEC is reportedly weighing supply cuts. WTI oil futures fell $US1.54 per barrel to US$50.02.

Meanwhile, Chinese stimulus measures and a more positive outlook for US economic growth lowered demand for gold. Gold prices fell US$13.4 per ounce to US$1,575.7.

Australia: Yesterday’s data revealed the upturn in dwelling prices had deepened. The housing market recovery that began with prices has now broadened to building approvals.

Building approvals fell by only 0.2% in December, after a gain of 10.9% in November. In annual terms, building approvals lifted 2.7%, which is the first month of annual growth since June 2019.

Building approvals are notoriously volatile, especially around the turn of the year. In trend terms, which smooths out month-to-month volatility, building approvals rose by 2.1% in December, which is the fourth straight monthly increase.

The upturn in dwelling prices deepened in January, although the speed of growth on a monthly basis lost some momentum. Dwelling prices rose by 0.9% across the combined capital cities in January, according to CoreLogic data, after rises of 1.2% in December and 2.0% in November. On a year ago, prices were up 5.2%, which is the highest growth rate since November 2017.

We expect dwelling prices to continue to grow over the year ahead, led by double-digit annual growth rates in Sydney and Melbourne.

In other data, job advertisements rose by 3.8% in January, after dropping 5.7% in December.

China: China’s industrial profits were already falling again in December, before the spread of the new coronavirus, which threatens to hurt earnings in Q1. Industrial profits fell 6.3% in December from a year earlier. That reversed a 5.4% rise in November, which broke a three-month streak of declines. For 2019, industrial profits were down 3.3%, compared with a 2.1% drop in first 11 months of the year.

The Caixin purchasing managers’ index (PMI) for manufacturing declined to 51.1 in January, from 51.5 in December.

Europe: The final reading of the Markit Eurozone PMI for January was revised up slightly to 47.9 from 47.8 previously. Although still below the 50 level that separates expansion from contraction, it signals a slight improvement in activity after a protracted period of weakness.

United States: Manufacturing companies fared much better in January, according to the latest ISM manufacturing survey. The headline measure firmed to 50.9, with most components stronger over the month. It was the first outturn in six months above 50 (signalling expansion in the sector) and comes after an almost four-year low in December.

 

Today's key data and events:

NZ Building Permits Dec prev -8.5% (8:45am)

AU RBA Board Meeting exp 0.75% prev 0.75% (2:30pm)

UK Markit Construction PMI Jan exp 47.1 prev 44.4 (8:30pm)

EZ PPI Dec exp 0.0% prev 0.2% (9pm)

US Dur. Goods Orders Dec final exp -2.4% prev -2.4% (2am)

US Factory Orders Dec exp 1.2% prev -0.7% (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.

 

 

Nelson Aston, Economist Ph: 02-8254-1316