Bank of Melbourne

Morning Report

Main Themes: A fresh wave of positive sentiment boosted markets overnight. Investors took news that the rate of new infections from the coronavirus has peaked as a signal that the outbreak will be contained. Meanwhile, Fed Chair Powell reiterated that monetary policy settings remained appropriate in his testimony to congress.
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Main Themes: A fresh wave of positive sentiment boosted markets overnight. Investors took news that the rate of new infections from the coronavirus has peaked as a signal that the outbreak will be contained. Meanwhile, Fed Chair Powell reiterated that monetary policy settings remained appropriate in his testimony to congress.

Share Markets: US equities mostly firmed overnight. Positive sentiment around the coronavirus supported stocks. More substantial gains were eroded following news that the Federal Trade Commission (FTC) was probing some large tech firms for information about anti-competitive acquisitions. There have been concerns that large tech firms, such as Facebook, have been purchasing smaller competitors and then closing them to eliminate competition. The Dow Jones is currently unchanged, after being as much as 0.5% higher earlier in the session.

German shares rallied to record highs, led by Deutsche Telekom following the approval for US telecom T-Mobile to takeover wireless carrier Sprint in a US$26 billion merger. Deutsche Telekom owns 63% of T-Mobile. Sprint shares rose 74% following the news and T-Mobile rose 11%.

Interest Rates: Bond yields around the world rose, buoyed by positive sentiment towards the impact of the coronavirus and reassurance from Fed Chair Powell that the US economy remains resilient.

10-year US treasury yields rose 4 basis points to 1.59% while at the shorter-end, the 3-month bill yield increased 1 basis point to 1.58%.

Australian bond yields were little changed yesterday. The 10-year and 3-year yields edged up 1 basis point each to 1.04% and 0.72%, respectively. The three month bank bill swap yield was unchanged at 0.91%.

Foreign Exchange: The US dollar index ended its winning streak, falling for the first time in seven sessions. It edged lower by 0.08% overnight, but is still up more than 1% this month amid a move to safe-haven assets due to caution surrounding the coronavirus.

A more favourable attitude towards risk, as well as a firm daily fix of the Chinese yuan by the People’s Bank of China (PBoC), left the Australian dollar stronger overnight. It rose 0.4% to US$0.6712.

Bitcoin has been rallying in 2020, and was up 4.1% to move back above US$10,000. The cryptocurrency is up more than 40% this year, but remains well below levels reached during the crypto-mania period in 2017 when prices rose above US$18,000.

Commodities: Oil prices recovered as coronavirus fears abated. WTI futures recovered from yesterday’s one-year low to US$50.0 per barrel. Oil prices have been heavily impacted by the pandemic as demand for oil has dried up. Gold and other base metals fell as investors turned more risk-on.

Australia: New lending for dwellings surged in December, as fear of missing out set in further among owner-occupiers and first-home buyers.

The value of new home loans (excluding refinancing) rose 4.4% in December. A 5.1% jump in the value of loans to owner-occupiers drove the result. The value of new investor loans rose 2.8%.

The number of new loans (excluding refinancing) to owner-occupiers increased 3.5% in December. On an annual basis, loans to owner-occupiers turned positive, increasing 3.5% over the year.

Loans to construct a dwelling rose 5.1% in December, bouncing back from an 8.5% fall in November. Lending for this purpose has been volatile in recent months, but has shown tentative signs of improvement, rising in three of the past four months. On an annual basis, loans for construction continue to fall, and were down 3.4% in December.

The recent recovery in new lending has seen loans for the construction of dwellings underperform. Additionally, existing mortgage holders appear to be paying down their debts at a faster rate. This suggests that more time is required for the housing market recovery to permeate to residential construction investment and consumption.

While housing borrowing boomed in December, businesses remained downbeat in January, according to the NAB monthly business survey. The business conditions index was unchanged at +3, stabilising well below the long-run average of +6. Business confidence edged higher, but also remains at a weak level, at -1 in January. Continued weakness in forward orders (-1) suggests that businesses expect conditions to remain difficult.

China: Authorities in China said they would allow local governments to sell an additional US$122 billion of additional debt before March, as part of further measures to offset the impact of the coronavirus.

United Kingdom: The UK economy narrowly avoided a contraction in the fourth quarter, saved by a 0.3% increase in GDP in the month of December. The economy was slowing quickly before December’s election, but economic growth appears to have improved since.

United States: US Fed Chair Jerome Powell gave the first of his two testimonies to congress overnight. He reiterated that the Fed would be unlikely to change interest rates unless the outlook was to change materially. While he spruiked the resilience of the US economy, he also warned that spillovers from the coronavirus pose a significant threat to the US economic expansion.

Economic data showed that small business sentiment beat expectations. The NFIB survey rose to 104.3 in January from 102.7 in December. Balancing the more positive small business sentiment, job openings fell by 364,000 to 6.42 million in December. Job openings have historically been a good leading indicator for the labour market, and were the preferred measure for former Fed Chair Janet Yellen. They inject a note of caution into the strong employment gains seen recently.

 

Today's key data and events:

NZ Retail Card Spending Jan exp 0.4% prev -0.8% (8:45am)

JN M2 Money Jan y/y% exp 2.7% prev 2.7% (10:50am)

NZ RBNZ Official Cash Rate exp 1.00% prev 1.00%

JN Machine Tool Orders Jan y/y% prev -33.5% (5pm)

EZ Industrial Prod. Ex Constr. Dec exp -2.0% prev 0.2% (9pm)

US Fed Chair Powell Testifies (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