Bank of Melbourne

Morning Report

Main Themes: Investors were more optimistic overnight. This optimism was underpinned by expectations that the novel coronavirus would eventually be contained and US jobs data that showed the strongest monthly gain in nearly 5 years.
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Main Themes: Investors were more optimistic overnight. This optimism was underpinned by expectations that the novel coronavirus would eventually be contained and US jobs data that showed the strongest monthly gain in nearly 5 years.

Share Markets: US share markets for a third straight day amid rising optimism China’s coronavirus will be contained. The Dow Jones rose by 483 points (+1.7%) and the S&P 500 index lifted by 32 points (+1.0%).

Interest Rates: US bond yields gained ground overnight, underpinned by better-than-expected US employment data. The US 2-year bond yield rose 3 basis points and the 10-year bond yield increased 5 basis points.

Foreign Exchange: The USD was an outperformer overnight, appreciating on the back of solid US economic data. The AUD/USD exchange rate pushed up from an overnight low of 0.6735 to a high of 0.6774, but gave up ground as the greenback strengthened. The AUD/USD appears to be consolidating around the 0.6750 for now.

Commodities: Crude oil prices rose overnight, erasing two days of losses, as the potential for OPEC output cuts offset news of a larger-than-expected US inventory build.

Australia: Reserve Bank (RBA) Governor Lowe gave a speech yesterday, titled “The Year Ahead”. In this talk, he confirmed the bullish stance the RBA has taken since the new year. The governor reiterated that monetary policy easing has had a positive impact on economic growth, citing improved labour market outcomes and higher asset prices.

However, he did say that further cuts to the interest rate were likely in the event that no significant progress was being made in meeting the RBA’s key objectives of full employment and the inflation target of 2-3%.

Dr Lowe said that the Board had considered further cuts in order to meet the bank’s objectives in 2019. The RBA estimates that bushfires will subtract 0.2 percentage points from growth across Q4 2019 and Q1 2020. The full amount is expected to be offset by a bounce back throughout the rest of the year. The governor accepted that the coronavirus was likely to have an impact on domestic growth, but said that it was too early to quantify.

After the speech, cash-rate futures pushed out pricing for the next full rate cut from July to August.

Europe: Retail sales tanked 1.6% in December, after a rise of 0.8% in November. Annual retailing growth slowed to a pace of 1.3%, from 2.3%.

The Markit’s final purchasing managers’ indexes (PMIs) for January lifted from their flash readings.

New Zealand: The labour market tightened in the December quarter. Unemployment dipped to 4.0%, its lowest since 2008. Wages growth increased by 0.7%, the fastest pace in ten years. The tightening was assisted by a drop in the participation rate which fell to 70.1% in December, from 70.4% in the September quarter.

China: The Caixin services purchasing managers’ index (PMI) edged slightly lower to 51.8 in January, from 52.5 in December. The reading suggests that the services sector in China had been performing reasonably well prior to the ramp up in the spread of the coronavirus. The services sector is expected to be heavily impacted by the coronavirus, which has had an expanding effect on Chinese activity in recent weeks.

United States: Employment in the private sector jumped 291,000 in January, after a gain of 199,000, according to ADP. This result was well above market expectations that centred on a rise of only 157,000. It is the best monthly gain in nearly 5 years. Growth was broad based across a swath of industries.

The final outcome for durable goods orders climbed 2.4% in December, unchanged from last week’s initial estimate.

The trade deficit expanded to US$48.9 billion in December, from US$43.7 billion in November.

However, for the calendar year 2019, the trade deficit shrunk, which was the first contraction in six years. The annual trade deficit narrowed 1.7% to US$616.8 billion.

The ISM non-manufacturing index rose by 0.6 points to 55.5 in January, suggesting expansion in the services sector is likely to continue in the months ahead.

 

Today's key data and events:

AU Trade Balance Dec exp $6.7bn prev $5.8bn (11:30am)

AU Retail Sales (11:30am)

   Value Dec exp -0.2% prev 0.9%

   Volume Q4 exp 0.2% prev -0.1%

AU NAB Business Confidence Q4 prev -2 (11:30am)

US Jobless Claims w/e Feb 1 exp 215k prev 216k (12:30am)

US Unit Labour Costs Q4 exp 1.3% prev 2.5% (12:30am)

US Fed’s Kaplan Speech (1:15am)

 

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