Bank of Melbourne

Morning Report

Main Themes: The warning from Apple about its outlook damaged sentiment overnight and added to fears about the impact of the novel coronavirus.
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Main Themes: The warning from Apple about its outlook damaged sentiment overnight and added to fears about the impact of the novel coronavirus.

Share Markets: US share market bourses are trading lower after Apple warned that it will not meet its sales target due to the effects of COVID-19.

Apple’s share price dropped after it downgraded its outlook, reviving concern about Apple’s over-reliance on China. The demand and supply of iphones have been hit as Chinese factories resume work more slowly than anticipated and as many Chinese Apple stores remain closed. Apple could also miss its schedule for mass producing a more affordable iphone, which is set to launch in the US Spring.

The Dow Jones is currently down 147 points (or -0.5%) and the S&P 500 index is 6 points lower (or -0.2%).

Across in the UK and HSBC also announced it will slash around 35,000 jobs. HSBC tumbled the most since 2009.

Interest Rates: US 2-year treasury yields extended yesterday’s decline, falling 2 basis points to 1.41%. Meanwhile, US 10-year bond yields fell 3 basis points to 1.55%.

Interest-rate markets are pricing a 10% chance of easing at the next Federal Reserve decision on March 18 and a terminal rate of 1.10% (versus the Federal Reserve’s current mid rate of 1.63%).

Australian 3-year government bond yields fell from 0.72% to 0.70%. Australian 10-year yields declined from 1.04% to 1.01%. Interest-rate markets are pricing a 7% chance of easing at the next Reserve Bank meeting on March 3.

Foreign Exchange: The AUD/USD lost considerable ground in the past 24 hours, falling from a high of 0.6718 to a low of 0.6674. Fears about the impact of COVID-19 on global-supply chains and world economic growth are growing. The AUD can often trade as a “barometer” for world-growth prospects, making it vulnerable to selling when the outlook for world growth dims. There is potential for AUD/USD to fall further in the near term.

Commodities: In overnight trade, oil declined and the price of gold rose.

Australia: The Reserve Bank (RBA) met on February 4 and kept the cash rate at a record low of 0.75%.

The clear theme in the minutes was the uncertain times facing RBA policymakers. On the global economy, trade tensions could re-escalate and the novel coronavirus had emerged as a new downside risk. On the domestic front, the forecast recovery in consumption was less certain.

Despite these ongoing and fresh uncertainties, the RBA continues to expect economic growth to return to trend this year and grow above trend in 2021.

The RBA acknowledged COVID-19 was still evolving and it was too early to determine the extent to which growth in China would be affected or the nature of international spillovers.

The projected improvement in the GDP profile for the Australian economy over the second half of this year and through 2021 partly rests on household consumption increasing gradually, but it is also the “key uncertainty” for the outlook.

Consumers are grappling with slow growth in incomes and have been directing more income to saving and reducing their debt. A recovery in housing prices should help consumption, but the RBA warns it is too soon to see a response and it is unclear for how long the period of balance sheet adjustment will continue.

In reviewing the cash-rate settings, the minutes again underscored the RBA was “prepared to ease monetary policy further if needed”.

However, these minutes suggested the RBA has tempered its bias to ease. In particular, the RBA discussed the case for cutting, which is primarily to speed up the progress towards the Bank’s goals and make it more assured in the face of current uncertainties. And it debated the case for not cutting. A further reduction in interest rates could encourage additional borrowing at a time when housing was in a strong upturn.

We still see the risk of more easing later this year from the central bank, but it may now also depend more critically on how deep and long-lasting international developments are.

Europe: Germany’s ZEW survey showed that economic expectations fell from 26.7 in January to 8.7 in February. Germans have become gloomier, as they fret about the impact of COVID-19 on Germany’s manufacturing sector. The euro area’s ZEW measure also decline in February.

United States: The New York Federal Reserve’s Empire State survey rose sharply from 4.8 in January to 12.9 in February. However, the optimism revealed in this region is unlikely to be echoes in other manufacturing regions in the US. Global supply chain frictions are looming due to large chunks of Chinese production being disrupted due to COVID-19.

The NAHB homebuilder sentiment index slipped 1 point in February to 74, which is still near a multi-year high. Low mortgage rates and a strong labour market are underpinning demand in the US housing market.

 

Today's key data and events:

AU WBC Leading Index Jan prev 0.05% (10:30am)

JN Trade Jan exp -¥1684.8bn prev -¥154.6bn (10:50am)

JN Core Mach. Orders Dec exp -8.9% prev 18.0% (10:50am)

AU Skilled Vacancies Jan prev 0.6% (11am)

AU Wage Price Index Q4 exp 0.5% prev 0.5% (11:30am)

EZ Current Account Dec prev €33.9bn (8pm)

UK CPI Jan exp -0.4% prev 0.0% (8:30pm)

UK House Price Index Dec exp 2.4% prev 2.2% (8:30pm)

EZ Construction Output Dec prev 0.7% (9pm)

US Federal Reserve’s Bostic Speech (12:10am)

US Federal Reserve’s Mester Speech (12:30am)

US Housing Starts Jan exp 1420k prev 1608k (12:30am)

US PPI Final Demand Jan exp 0.1% prev 0.2% (12:30am)

US Federal Reserve’s Kashkari Speech (3:45am)

US Federal Reserve’s Kaplan Speech (5:30am)

US FOMC Meeting Minutes for Jan 29 (6am)

 

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