Bank of Melbourne

Morning Report

Main Themes: US economic data disappointed but investors took heart from declining new COVID-19 infections. There were further indications that the Chinese authorities will implement stimulus measures to offset the economic impact.
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Main Themes: US economic data disappointed but investors took heart from declining new COVID-19 infections. There were further indications that the Chinese authorities will implement stimulus measures to offset the economic impact.

Share Markets: Despite economic data missing expectations, most major US stock indices eked out gains. The S&P 500 rose 0.2% to another fresh record. The Dow Jones closed down 0.1%. US markets will be closed tonight for the Presidents’ Day holiday.

The ASX 200 ended the week on a positive night, rising 0.4% on Friday. It was the fourth consecutive session of gains, with local investors shrugging off the likely substantial economic impact of the coronavirus on Q1 GDP.

Interest Rates: US and European bond yields declined as economic data on both continents missed expectations.

The yield on the US 10-year treasury fell 3 basis points to 1.59% as some areas of US retail sales showed weakness. Data showing zero growth in the German economy in the fourth quarter put pressure on government bond yields across the Eurozone. The yield on the 10-year German bond yield is currently 0.40%.

Australian bond yields were unchanged on Friday. The 10-year bond yield closed at 1.06% while the 3-year is at 0.72%. Markets are pricing in just a 6.6% chance of a rate cut at the RBA’s March meeting and a terminal rate of 0.47% from the current rate of 0.75%.

Foreign Exchange: Currency markets were relatively quiet on Friday. The US dollar index closed up 0.1% with most currencies little changed.

The Australian dollar kept in a tight range between US$0.6706 and US$0.6729. It is currently at US$0.6721 this morning.

Commodities: Oil prices advanced further as the number of new COVID-19 cases declined further, boosting the prospects that transport activity and oil demand will recover. WTI futures rose US$0.60 per barrel to US$52.0. Gold prices rose higher to US$1,584.3 per ounce.

Australia: There was no major data released Friday.

New Zealand: Sentiment among manufacturing firms improved slightly in January, but businesses conditions remain difficult. The BNZ-Business NZ performance of manufacturing survey edged up to 49.6 in January from 49.2 in December. The latest result suggests that the coronavirus is yet to have a material impact on New Zealand manufacturing firms.

China: Local news reports suggested that China plans to reduce business taxes to ease some of the impact of the coronavirus. There is also a planned US$120 billion worth of additional stimulus measures and relaxation of lending restrictions. There were 69,267 globally confirmed cases of COVID-19 on Saturday, up 2,169 from Friday. On Friday there were 2,657 new cases.

Eurozone: Eurozone growth tempered as expected in Q4 2019. A slowdown in France and Italy led the moderation. The economy expanded 0.1% in Q4, down from 0.3% in Q3. Growth in Germany stagnated.

United States: Consumer spending slowed further in January. Retail sales rose 0.3% over the month, with clothing store sales declining by the most since 2009. An unusually mild winter may have impacted demand. Core sales (which feed into GDP statistics) were unchanged over the month and December’s figure was revised lower.

Industrial production slowed 0.3% in January, dragged lower by depressed demand for utilities. Utilities production fell 4.0% over the month.

Meanwhile, the US announced that it would be implementing further tariffs on European aircraft following a ruling by the World Trade Organisation (WTO). The tariffs will specifically affect Airbus, which was increased from 10% to 15%. There had been some speculation that the tariffs would be across a broader range of products.

 

Today's key data and events:

NZ Performance Services Index Jan prev 51.9 (8:30am)

NZ Net Migration Jan prev 2,610 (8:45am)

JN GDP Q4 exp -1.0% prev 0.4% (10:50am)

JN Industrial Production Dec prev 1.3% (3:30pm)

JN Capacity Utilisation Dec prev -0.3% (3:30pm)

EZ Construction Output Dec prev 0.7% (9pm)

EZ ECB Board Member Lane Speaks (1am)

 

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