Bank of Melbourne

Morning Report

Main Themes: The Fed announced an emergency 50 basis point rate cut. Equities fell and bonds rose as investors worried that the cut still won’t offset the economic impact of the coronavirus. Earlier in the evening G7 finance leaders held a conference call. Ministers and central banks pledged to act to contain the fallout from the virus.


Main Themes: The Fed announced an emergency 50 basis point rate cut. Equities fell and bonds rose as investors worried that the cut still won’t offset the economic impact of the coronavirus. Earlier in the evening G7 finance leaders held a conference call. Ministers and central banks pledged to act to contain the fallout from the virus.

Share Markets: US equity bourses ended a volatile session sharply lower. The Dow Jones is down 2.2% while the S&P 500 is 2.4% lower. The Fed interest rate cut announcement came shortly after Wall Street had opened. Stocks rose initially, but resumed their slide shortly afterwards.

European equity markets fared better than their US counterparts. The Euro Stoxx 50 rose 1.0%.

Interest Rates: US treasury yields plunged to record lows following the Fed’s surprise 50 basis point rate cut and continued coronavirus worries. The Fed Funds target rate is now between 1.00-1.25%. The US 10-year treasury yield declined sharply towards the end of the session, falling below 1.00% at one point. It ended the session down 8 basis points at 1.01%. The 2-year yield fell 13 basis points to 0.69% while the 3-month treasury-bill yield was 22 basis points lower at 0.95%.

Following the Fed announcement and G7 finance leaders’ conference call, expectations for further easing around the globe have risen. Interest rate markets are pricing in 3 more Fed cuts by the end of the year.

Australian bond yields were mixed yesterday. The 25 basis point Reserve Bank (RBA) rate cut was already fully priced into interest rate markets. The 10-year bond yield fell 2 basis points to 0.79% while the 90-day bank bill swap rate rose 2 basis points to 0.59.

Foreign Exchange: The US dollar index dropped by 0.214 to 97.146 overnight. Trading was generally range-bound before and after the Fed’s surprise rate cut, with the leg lower in the dollar occurring immediately following the announcement. The US Fed has more room to cut rates than many other major currencies, which is a factor that weighed on the dollar.

Safe-haven currencies of the yen and Swiss franc both recorded gains against the US dollar as investors continued to accumulate risk-off assets.

The Australian dollar bounced from its lows, rising above US$0.6645 at one point. It is currently at US$0.6593.

Commodities: Gold prices recorded further gains overnight, rising 3.0% to US$1637.6 per ounce. Oil prices held onto their early-session gains, but trended lower as coronavirus fears intensified. Oil has been one of the hardest hit commodities in the wake of the coronavirus as demand for transport services has evaporated. WTI futures were up 1.3%, but prices remain well below US$50 barrel at US$47.3 this morning.

COVID-19: Global confirmed cases rose to 92,739 overnight. New cases inside China were at the lowest since January 20, but continue to ramp up globally. Italy and Iran are continuing to see rapid increases in new cases and the death toll is also rising. The death-toll inside the US has risen to 9. Chile and Argentina both reported their first confirmed cases.

Australia: The RBA cut interest rates yesterday by 25 basis points to 0.50%. The move was expected by ourselves and the market following a “call to action” over the weekend by US Fed Chair Jerome Powell. Fears over the COVID-19 outbreak pushed the RBA to act. Prior to yesterday, RBA rhetoric had been that the economy was improving and that further easing was less warranted.

Building approvals fell by a sharp 15.3% in January, more than unwinding the two months of gains over November and December. The detail in the report showed that a large fall in high-rise approvals (especially in Victoria) led the decline. We expect building approvals in detached housing and low-rise-density dwellings to continue to improve, but building approvals for high-rise dwellings will struggle, especially with the current debt coverage requirements.

Separate data showed that the current account registered its third consecutive surplus in the December quarter. However, falling commodity prices and deterioration in the terms of trade have put downward pressure on the surplus. The December quarter surplus narrowed by $5.5 billion to $0.96 billion. We do not expect persistent current account surpluses to continue.

Exports measured in volume terms were broadly flat in the December quarter and import volumes fell by 0.1%. Net exports are expected to contribute 0.1 percentage points to GDP growth in the December quarter.

Government spending surprised to the downside. Government investment fell 0.4% during the December quarter while consumption rose 0.7%. Government spending is expected to contribute 0.1 percentage points to growth in the December quarter.

Europe: Consumer prices rose more slowly in February than in January. The slowdown was as expected due to the fall in oil prices over the month. The CPI rose 1.2% over the year in February compared with a 1.4% increase in January.

United States: The Fed announced an out-of-cycle (or emergency) 50 basis point rate cut overnight. The Fed funds target range is now 1.00-1.25%. Emergency rate cuts are highly unusual but not unprecedented. The last time one occurred was in 2008 during the GFC. The next scheduled Federal Open Market Committee (FOMC) meeting is March 18.

In its accompanying statement, the Fed said that the US economy was in good shape, but that easing was required to boost growth and confidence in order to cushion the impact of the coronavirus. In a short press conference following the cut, Chair Powell acknowledged that monetary policy alone will not be enough to curb the impact of the virus.

Additionally, the FOMC issued a press release to confirm that the NY Fed would be extending its repo market liquidity program through to April 2020 at least.

Before the Fed’s decision, G7 finance ministers and central bankers held a conference call. In a show of coordination, they pledged to act as necessary, including fiscal support. No further specific details were provided.



Today's key data and events:


AU AiG Perf. of Construction Index Feb prev 41.3 (8:30am)

NZ Building Permits Jan prev 9.9% (8:45am)

AU GDP Q4 (11:30am)

   Q/Q exp 0.5% prev 0.4%

   Y/Y exp 2.0% prev 1.7%

CH Composite PMI Feb prev 51.9 (12:45pm)

CH Services PMI Feb exp 48.0 prev 51.8 (12:45pm)

EZ Retail Sales Jan exp 0.6% prev -1.6% (9pm)

US ADP Employment Feb exp 170k prev 291k (12:15am)

US Markit Serv. PMI Feb Final exp 49.4 prev 49.4 (1:45am)

US Markit Composite PMI Feb Final prev 49.6 (1:45am)

US ISM Non Mfg Index Feb exp 54.9 prev 55.5 (2am)

US Federal Reserve Beige Book (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.


Nelson Aston, Economist Ph: 02-8254-1316