Bank of Melbourne

Morning Report

Main Themes: Markets returned to relative calm at the end of the overnight session, having briefly panicked over a spike in the number of reported COVID-19 cases in China.
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Main Themes: Markets returned to relative calm at the end of the overnight session, having briefly panicked over a spike in the number of reported COVID-19 cases in China.

Share Markets: Major US stock indices are down slightly, but are up from their session lows. Investors had been spooked by a sudden rise in the number of coronavirus cases reported by the Chinese authorities after it switched to a new diagnosis methodology. The World Health Organisation (WHO) said that the spike didn’t point to an increase in the rate of new infections, with many cases dated back days and sometimes weeks.

The S&P 500 is unchanged while the Dow Jones is down 0.3%. Most other major global stock indices fell, including the Euro Stoxx 50 (-0.2%) and the FTSE 100, which declined 1.1% after the surprise announcement that Sajid Javid quit as the Chancellor of the Exchequer.

Yesterday, the ASX 200 was one of the few global indices to rise, edging higher by 0.2%

Interest Rates: US treasury yields were mixed as investors weighed coronavirus risks with a report showing US consumer prices firming. Strong demand at an auction for new 30-year bonds also encouraged buyers of longer-dated bonds.

The 10-year treasury yield fell 2 basis points to 1.61 while at the shorter end, the 3-month treasury bill yield inched higher by 1 basis point to 1.58%.

Foreign Exchange: The US dollar index ended a mixed session unchanged, recovering from its lows earlier in the evening. The pound was the standout overnight, surging as Sajid Javid quit as the Chancellor of the Exchequer, signalling a bigger UK budget is likely. The pound is up 0.7% to US$1.3047.

The Australian dollar continued to feel the brunt of swinging sentiment towards the coronavirus. The AUD traded down for most of the session against the dollar, briefly recovering after the WHO downplayed the surge in the number of COVID-19 cases. The Australian dollar is down 0.3% at US$0.6719.

Commodities: Global oil demand is set to fall for the first time in a decade, according to the International Energy Agency. The spread of the COVID-19 infection has led to a glut of oil in China, as tanker ships are being diverted to South Korea and Malaysia. Nevertheless, WTI crude futures rose overnight to US$51.4 per barrel.

Gold prices rose amid the uncertainty, ending the session higher by 0.7% at US$1,576.63 per ounce.

Australia: Consumer inflation expectations moderated in February. The Melbourne Institute Consumer Inflation Expectations Index fell to 4.0% from 4.7% in January. Measured inflation, both at a core and headline level, has been running below the RBA’s target band of 2-3% for more than three years.

Speaking at the Australia-Canada Economic Leadership Forum in Melbourne, RBA Governor Philip Lowe said that the COVID-19 infection would have an immediate impact on economic growth. He reiterated that the RBA sees the Australian economy as being in a good place absent the effect of the virus. The governor noted the negative impact on tourism, education and business deals in the short term, but said that the effects would be temporary.

On climate change, Dr Lowe warned that the economic impact will be profound. He said that there was no way of avoiding the financial impact from climate change, and pointed to a report from the Bureau of Meteorology highlighting rising temperatures in Australia. Although the RBA has no responsibility to address solutions to climate change, he said that it was prudent to understand the economic and financial implications.

China: China recently deployed a revised methodology for diagnosing the COVID-19 virus, leading to a 15,000 increase in the number of reported cases. However, the increase is believed to be a one-off level increase, with the rate of new infections continuing to slow.

Under the new methodology, there are a total of 60,414 coronavirus cases with 1,370 deaths and 6,296 recoveries.

United Kingdom: House prices turned broadly positive in January, according to the RICS survey of surveyors and agents. A net balance of 17% reported increases in house prices compared with decreases. It was the first positive outturn since July 2018.

United States: Consumer price inflation rose in January, but remains low. The CPI edged up 0.1% over the month, with the headline annual rate now at 2.5%. Core inflation rose 0.3% over the month and was 2.3% higher over the year.

The New York Fed said it would shrink its repo operations beginning Friday. It was forced to intervene in September last year after a liquidity crunch in the repurchasing market led to a surge in short-term lending rates, well above the Fed funds target rate.

 

Today's key data and events:

NZ BusinessNZ Mfg Survey Jan prev 49.3 (8:30am)

NZ Food Prices Jan prev -0.2% (8:45am)

US Fed Williams Speaks (9:30am)

JN Tertiary Industry Index Dec exp 0.1% prev 1.3% (3:30pm)

EU German GDP Q4 exp 0.1% prev 0.1% (6pm)

EZ Trade Balance Dec exp €19.3bn prev €19.2bn (9pm)

EZ GDP Q4 exp 0.1% prev 0.1% (9pm)

US Retail Sales Advance exp 0.3% prev 0.3% (12:30am)

US Industrial Production Jan exp -0.2% prev -0.3% (1:15am)

US Capacity Utilisation Jan exp 76.8% prev 77.0%

US Uni. Mich. Cons. Sentiment Feb exp 99.4 prev 99.8 (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