Main Themes: Investor sentiment continued to improve on hopes the novel coronavirus will eventually be contained. Confirmation from China’s government that it will halve tariffs on US goods also buoyed sentiment, which flowed on to a lift in equities and global bond yields.
Share Markets: The rally in equity markets continued for a fourth straight trading session. Plans by China to cut US tariffs and positive earnings results overshadowed concerns about the coronavirus outbreak and supported demand for shares. Currently, the Dow Jones is up 97 points (or +0.3%) and the S&P 500 index is 10 points higher (or +0.3%).
Interest Rates: US bond yields consolidated their recent gains. US 2-year treasury yields have ranged sideways between 1.41% and 1.47% to be 1 basis point higher at the time of writing. Meanwhile, US 10-year bond yields are unchanged from the previous session’s close.
Interest-rate markets are attaching a probability of 15% of an easing at the next Federal Reserve meeting on March 18 and a terminal rate of 1.15% (versus the Fed’s current mid-rate of 1.63%).
Australian 3-year government bond yields ranged sideways between 0.74% and 0.77%. The Australian 10-year yield traded between 1.08% and 1.11%.
Interest-rate markets are pricing a 9% chance of easing at the next Reserve Bank (RBA) meeting on March 3 and a terminal rate of 0.45% (versus the current RBA cash rate of 0.75%).
Foreign Exchange: AUD/USD was not able to hold on to recent gains, falling from a recent high of 0.6774 to an overnight low of 0.6730. While risk sentiment has improved, recent robust US economic data has led to an appreciation in the USD. The USD index appreciated from 97.7 to the 98.5 handle in overnight trade. The AUD/USD exchange rate is likely to move under 0.6700 again in the short term. Strong support sits just under 0.6700 at around 0.6680, however.
Commodities: There is speculation that OPEC officials have recommended additional cuts of 600,000 barrels in response to the coronavirus crisis. However, oil prices still fell overnight. The suggestion needs approval by OPEC+ ministers, but Saudi Arabia and Russia remain at odds. Russia said it needs more time to assess the impact of the outbreak before making a decision.
Australia: The RBA Governor will appear before the House of Representatives Economics Committee this morning from 9:30am AEST to discuss the outlook for economy. The quarterly Statement on Monetary Policy will also be released at 11:30am. It will include the RBA’s full set of updated forecasts.
Yesterday, data revealed consumers took advantage of Black-Friday deals in November to do their Christmas shopping early. But November’s surge in retail sales proved short-lived. Retail sales dropped 0.5% in December, which was the biggest monthly decline in more than 2 years.
Soggy consumer spending and fragile sentiment spurred retailers to try to attract customers by discounting in the December quarter. Significant discounting resulted in retail sales volumes rising by 0.5% in the December quarter.
Looking through the Black-Friday-sales effect, retailing conditions look to have improved slightly, but remain depressed. High household debt and low wages growth continue to weigh on spending. Consumer sentiment is also fragile, as consumers continue to fret about the economic outlook.
Retailing conditions were generally difficult in 2019, reflected by a spate of store closures and liquidations. Annual growth of retailing values averaged 2.7% for the year, well below the long-run average of 3.5%.
There may also have been an impact from the bushfire disaster, which was beginning to affect economic activity in December. This was apparent in the fall in cafes, restaurants & takeaway spending.
The firm increase in house prices over recent months suggests that a recovery in consumer spending could be in store for 2020. However, two major shocks - the summer bushfires and the novel coronavirus outbreak - threaten to dampen spending in the March quarter.
China: China confirmed it will halve tariffs on US$75 billion of imports from the US on February 14, reciprocating US action as part of the phase-one trade deal.
United States: Layoffs continue to show no signs of rising, despite some evidence of a slowing underway in the US economy. Initial jobless claims fell by 15,000 to 202,000 (near a post-recession low) in the week ending February 1. The more stable monthly average of jobless claims, which smooths the weekly volatility, dropped 3,000 to 211,750.
Dallas Federal Reserve President Robert Kaplan remains fairly bullish on the US economic outlook and sees no reason to change monetary-policy settings this year. Kaplan gave a 2020 GDP forecast of 2%-2.25%, adding it would be even better if not for the coronavirus outbreak and Boeing's woes.
In political news, US President Donald Trump was acquitted overnight.
Today's key data and events:
AU RBA Governor Semi-Annual Testimony to Parliament Committee (9:30am)
AU Statement on Monetary Policy (SoMP) (11:30am)
US Non-Farm Payrolls Jan exp 163k prev 145k (12:30am)
US Unemployment Rate Jan exp 3.5% prev 3.5% (12:30am)
US Avg Hourly Earnings Jan exp 0.3% prev 0.1% (12:30am)
US Federal Reserve’s Semi-Annual Monetary Policy Report to Congress (3am)
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