Bank of Melbourne

Morning Report

Main Themes: The market volatility of recent weeks continued overnight. This time, equities surged as markets gauged the potential for a more coordinated policy response to the coronavirus and the race for the Democratic presidential nomination narrowed to two candidates. The Australian Government announced that it was preparing to spend billions on a stimulus package to support businesses affected by the coronavirus outbreak.
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Main Themes: The market volatility of recent weeks continued overnight. This time, equities surged as markets gauged the potential for a more coordinated policy response to the coronavirus and the race for the Democratic presidential nomination narrowed to two candidates.

The Australian Government announced that it was preparing to spend billions on a stimulus package to support businesses affected by the coronavirus outbreak.

Share Markets: US stocks rallied after Congress agreed to an emergency spending bill. After falling by 2.9% yesterday, the Dow Jones is currently up 4.1%. The S&P 500 is up 3.2%. Healthcare stocks have led the rebound.

The ASX 200 fell 1.7% yesterday, but futures are pointing to a green open this morning.

Interest Rates: The US yield curve steepened further overnight as investors ramped up expectations for further Fed easing and contemplated an US$8 billion fiscal stimulus package authorised by Congress. The yield on the 3-month treasury bill fell 21 basis points to 0.74% while the 10-year yield edged up 2 basis points to 1.04%.

Australian bond yields were down across the curve yesterday. The 10-year bond yield fell 6 basis points to 0.73% while the 90-day bank bill swap yield fell 5 basis points to 0.55%. Interest rate markets are pricing in an 87.4% chance of a 25 basis point rate cut at April’s RBA meeting.

Foreign Exchange: The US dollar clawed back some of its losses sustained in the previous session following the Fed’s emergency 50 basis point rate cut. The US dollar index rose 0.236 to 97.389 overnight, its first increase in five sessions. Economic data for the US released overnight supported the dollar. The euro weakened as investors increased bets that the European Central Bank (ECB) would cut its deposit rate deeper into negative territory. The pound edged up by 0.0055 to US$1.2866 following comments from incoming Bank of England (BOE) Governor Andrew Bailey that were less dovish than expected.

The Australian dollar continued to trend higher overnight and is currently at US$0.6620.

Commodities: Oil prices fell overnight following a volatile session of trading. Prices were up strongly at one point amid speculation of a large output cut by OPEC+. However, the group wasn’t able to secure the agreement of Russia, who favoured maintaining the existing level of cuts (output had been cut recently) until the end of the second quarter. WTI futures fell US$0.5 per barrel to US$46.8.

Gold prices were broadly flat at US$1,637.2 per ounce.

COVID-19: Total global coronavirus cases topped 93,000. Cases in China continue to fall while infections are increasing in Europe. Italy has closed schools until March 15.

Australia: GDP data for the December quarter was stronger than expected, but showed that growth remains sluggish. The economy expanded 0.5% over the quarter, leaving the annual rate at 2.2%. Household consumption picked up by 0.4%, which was the fastest growth in a year. A fall back in the savings rate boosted consumption. Households had been repairing their balance sheets in the September quarter.

Investment remained lacklustre, but improved slightly from the September quarter. New business investment fell 0.8% in the December quarter. Dwelling investment fell 3.4% over the quarter. Residential construction is expected to improve following the housing price rebound. Indeed, ownership transfer costs and the real estate services industry registered a sharp return to growth over the December quarter.

The economy lost considerable momentum in the second half of 2018 and then recovered modestly through 2019. Annual growth remains well below trend, which is estimated at 2.75%. The coronavirus and bushfires are likely to have a significant impact on growth in the March quarter.

In response to the coronavirus outbreak, the Australian Federal Government is planning a significant stimulus package, according to Treasurer Josh Frydenberg. The package is likely to be in the billions and will target affected businesses. Further details will be released later today.

Late yesterday evening, RBA Deputy Guy Debelle told a parliamentary panel that the coronavirus outbreak will see a 10% fall in tourism and education exports. The RBA estimates the coronavirus to slash 0.5% from March quarter growth.

Europe: European finance ministers issued a release saying that they would use the “unusual events” clause within the Stability and Growth pact to allow for looser budget constraints in order to combat the impact of the coronavirus spread.

United Kingdom: The UK IHS Markit/CIPS Purchasing Managers’ Index (PMI) for manufacturing and services both rose in February. The PMIs suggest that the UK’s economic recovery is gathering pace. Incoming BOE chief Bailey said that the coronavirus would have a significant impact on the economy, but for the effect to be temporary. He also suggested that more evidence was required before an inter-meeting move would be considered.

Canada: The Bank of Canada (BoC) switched its bias and delivered a 50 basis point rate cut, and committed to further easing and liquidity if required. The overnight rate is now 1.25%.

United States: Economic data for February released overnight suggested that the US economy was on stable impact before the impact of the coronavirus. The ISM services index rose 1.8 points to 57.3 in February, boosted by measures of new orders and employment. Private payrolls data in February also increased more than expected. The coronavirus is expected to have a significant impact on growth in the coming months.

Following “Super Tuesday”, the nomination for the Democratic Party’s Presidential hopeful will be between Bernie Sanders and Joe Biden. Michael Bloomberg stepped out of the race as Joe Biden performed better than expected. Biden is expected to win 10 of the 14 states who voted.

World: IMF Managing Director Kristalina Georgieva said that global growth in 2020 will be lower than 2019 thanks to the coronavirus outbreak. The IMF also noted that it was difficult to predict the impacts of the outbreak.

 

Today's key data and events:

 

AU Trade Balance Jan exp $5.4bn prev $5.2bn (11:30am)

US Non-Farm Productivity Q4 exp 1.3% prev 1.4% (12:30am)

US Jobless Claims w/e Feb 29 exp 215k prev 219k (12:30am)

US Factory Orders Jan exp -0.1% prev 1.8% (2am)

US Durable Goods Orders Jan F exp -0.2% prev -0.2% (2am)

UK BOE Carney Speaks (4am)

 

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