Market WATCh Weekly 5 June 2020 FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au Financial Markets Overview Interest Rates Long-term government bond yields picked up across the advanced economies this week, reportedly helped by stimulus efforts of central banks and governments in the advanced economies, which are seen as helping the economic recovery. This week, the US Federal Reserve expanded the eligibility for its municipal liquidity facility, while the ECB almost doubled the size of the pandemic emergency asset purchase program to €1,350B. The German government unveiled its second stimulus package, taking the total amount of direct fiscal support to around 12% of GDP. The US Congress is working on the fourth stimulus package worth around US$3,000B. If approved, the total US fiscal response to the COVID-19 crisis will be equivalent to around 30% of GDP. US and Australian 10-year Treasury yields have reached the highest levels since March. At the front end of the yield curve, the volatility was relatively low, yet 3-year Australian government bond yields have moved slightly away from the RBA target of 0.25%. The RBA left its monetary policy settings unchanged as expected and did not conduct any government bond purchases for the fourth consecutive week. Equities Equity markets made further gains this week, as traders continue to shrug off the poor economic conditions, ongoing tensions between US and China, and the continuing spread of COVID-19. The large gatherings of protestors in the US this week, which could see an acceleration of the spread of COVID-19 in that country, were just another point of risk that traders chose to ignore. The Aussie market has added 3% since this time last week, with all the major indices making gains, led by the finance and energy sectors. The index is currently up 31% on its 23 March low. On Wall Street, the S&P 500 came within 8% of the all-time high on Wednesday, before easing a little overnight. This Week’s Highlights The RBA Board kept policy on hold as expected, the Q1 national accounts confirmed that Australia is in recession, the current account surplus was the biggest on record, building approvals fell less than expected in April the same month that saw an 18% slump in retail sales. In the US, the ISM indices indicated that US economic activity declined at a slower rate in May, the ADP payrolls report saw another large fall in May but nowhere near as big as expected. The official US employment report for May is due tonight. The Chinese PMIs indicated that economic activity expanded in May, and the ECB almost doubled its QE program to €1,350B. Next Week’s Highlights Domestic highlights next week will be the ANZ job ads report and NAB business survey for May on Tuesday, the Westpac consumer sentiment index for June. New home loans report for May is out on Wednesday. Elsewhere, Chinese trade report for May is scheduled for Sunday, FOMC decision as well as US and Chinese May inflation figures are due on Wednesday. Euro area industrial production for April and the preliminary report on US consumer sentiment for June will be released on Friday. For further information, please contact: Craig McGuinness Chief Economist [email protected](08) 9235 9104 Patrycja Beniak Economist [email protected](08) 9235 9110 Weekly Weekly Weekly Weekly Change Change Change Change Australia 0.25 (0 pt) O/N Interbank Cash 0.14 (↑1 pt) USD 3-month Libor 0.35 (↓1 pt) ASX200 5798 (↑264 pt) US (IOER) 0.10 (0 pt) 90-day Bills 0.10 (0 pt) 2-yr T-Notes 0.20 (↓1 pt) S&P500 3030 (↑81 pt) Eurozone (Deposit) -0.50 (0 pt) 3-yr T-Bond 0.27 (↑1 pt) 10-yr T-Notes 0.67 (↑1 pt) DJIA 25401 (↑927 pt) UK 0.10 (0 pt) 10-yr T-Bond 0.89 (↓1 pt) Jap 10-yr 0.00 (0 pt) Nikkei 21854 (↑1380 pt) Japan -0.10 (0 pt) WATC 2023 0.54 (↑1 pt) UK 10-yr 0.21 (↑3 pt) CSI300 3858 (↓17 pt) China (1Y LPR) 3.85 (0 pt) WATC 2029 1.34 (↓4 pt) Ger 10-yr -0.42 (↑7 pt) Stoxx600 355 (↑12 pt) Global Equities Interest Rates (%) Australian Interest Rates (%) Central Bank Rates (%) Major Overseas Source: Refinitiv Source: RBA, WATC
Transcript
Market WATCh Weekly 5 June 2020
FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au
Financial Markets Overview
Interest Rates
Long-term government bond yields picked up across the advanced economies this week, reportedly helped by stimulus efforts of central banks and governments in the advanced economies, which are seen as helping the economic recovery.
This week, the US Federal Reserve expanded the eligibility for its municipal liquidity facility, while the ECB almost doubled the size of the pandemic emergency asset purchase program to €1,350B. The German government unveiled its second stimulus package, taking the total amount of direct fiscal support to around 12% of GDP. The US Congress is working on the fourth stimulus package worth around US$3,000B. If approved, the total US fiscal response to the COVID-19 crisis will be equivalent to around 30% of GDP.
US and Australian 10-year Treasury yields have reached the highest levels since March. At the front end of the yield curve, the volatility was relatively low, yet 3-year Australian government bond yields have moved slightly away from the RBA target of 0.25%. The RBA left its monetary policy settings unchanged as expected and did not conduct any government bond purchases for the fourth consecutive week.
Equities
Equity markets made further gains this week, as traders continue to shrug off the poor economic conditions, ongoing tensions between US and China, and the continuing spread of COVID-19. The large gatherings of protestors in the US this week, which could see an acceleration of the spread of COVID-19 in that country, were just another point of risk that traders chose to ignore.
The Aussie market has added 3% since this time last week, with all the major indices making gains, led by the finance and energy sectors. The index is currently up 31% on its 23 March low.
On Wall Street, the S&P 500 came within 8% of the all-time high on Wednesday, before easing a little overnight.
This Week’s Highlights
The RBA Board kept policy on hold as expected, the Q1 national accounts confirmed that Australia is in recession, the current account surplus was the biggest on record, building approvals fell less than expected in April the same month that saw an 18% slump in retail sales.
In the US, the ISM indices indicated that US economic activity declined at a slower rate in May, the ADP payrolls report saw another large fall in May but nowhere near as big as expected. The official US employment report for May is due tonight.
The Chinese PMIs indicated that economic activity expanded in May, and the ECB almost doubled its QE program to €1,350B.
Next Week’s Highlights
Domestic highlights next week will be the ANZ job ads report and NAB business survey for May on Tuesday, the Westpac consumer sentiment index for June. New home loans report for May is out on Wednesday.
Elsewhere, Chinese trade report for May is scheduled for Sunday, FOMC decision as well as US and Chinese May inflation figures are due on Wednesday. Euro area industrial production for April and the preliminary report on US consumer sentiment for June will be released on Friday.
FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au
Currencies
The good global sentiment dominating the global financial markets for most of the week was supportive of the Australian dollar, which reached the highest level against the greenback since early January. Having appreciated by around 4.5%, the Aussie was the second strongest G10 currency this week, surpassed only by the New Zealand dollar.
Since the escalation of the pandemic in mid-March, the Aussie has strengthened by around 12% against the US dollar, making it the absolute leader among the currencies of the advanced economies.
The rise in AUD/USD this week was in part due to the weakness of the US dollar, which lost around 1% in trade-weighted terms. The US dollar depreciated by 2% against the euro, amid stimulus measures announced this week by the European Central Bank and the German authorities.
Commodities
Commodity prices continue to make their way higher, with the CRB commodity index currently on track for its sixth weekly gain in a row.
Oil prices have again been a major driver of the rise in the CRB index and are also on their way to a sixth consecutive weekly rise, as demand starts to recover and the OPEC+ group continued to progress towards an agreement to extend the current level of production cuts beyond the end of June. Under the current arrangement the 9.7 million barrel a day cuts are set to taper to 7.7 million barrels from July to the end of 2020.
Solid demand out of China and ongoing concerns over Brazilian supply continue to buoy iron ore prices, with the benchmark Singapore futures price touching US$100 in late trade last Friday.
CRB Index 135.75 135.91 128.06 (↑5.99) 187.87 101.48
Iron Ore Price 62% Fe (US$) ** $95.63 $100.80 $95.30 (↑$0.41) $119.20 $77.38
*Mogas95 is the Singapore benchmark petrol price closely linked to Australian domestic fuel prices.
** The Iron Ore Price is the SGX 62% iron ore futures 2nd contract.
Source: Refinitiv
Source: Refinitiv
Market WATCh Weekly 5 June 2020
FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au
Domestic Economy National Accounts (Q1)
Australian real GDP fell by 0.3% in seasonally adjusted terms in the first quarter of 2020, in line with market expectations. This was the first fall in quarterly GDP since 2011. Through the year, GDP growth decelerated to 1.4%, the lowest since the global financial crisis.
Retail Sales (Apr)
Retail sales fell by 17.7% MoM in seasonally-adjusted terms in April 2020, which was the largest drop on record (since 1982). The broad-based drop was triggered by wide-spread business closures and other social distancing measures imposed to contain the spread of the COVID-19 pandemic. It more than offset the 8.5% surge in March sparked by panic buying ahead of the partial lockdown.
Australian Industry Group Performance Indices (May)
The manufacturing PMI rose 5.8pts to 41.6 in May, indicating that activity contracted at a slower rate in the month (<50 = contraction). All the subindices improved with the exception of the export index, which fell to a record low.
The construction index increased to 24.6 after sinking to an all-time low of 21.6 in April. Conditions remain very depressed across the major subsectors, with the houses, apartments and commercial building indices picking up but remaining well and truly in contraction territory. The engineering index sank further below 50.
The rate of decline in the services sector also eased, with the services PMI gaining 4.5pts to 31.6 in May. This was the second lowest level on record. The employment index for services improved, yet, along with construction and manufacturing employment indices, still pointed to a deep and severe contraction.
Dwelling Approvals (Apr)
The number of dwelling approvals fell a seasonally adjusted 1.8% in April, after a 2.6% drop in March (revised from -4.0%). Private sector house approvals rose 2.7% to the highest level in 14 months against the market expectation for a 0.7% fall. Multi-dwelling approvals fell 8.9%, the second monthly seasonally-adjusted fall in a row, after hitting a 12-month high in February.
Trade Balance (Apr)
The Australian trade surplus narrowed to a seasonally-adjusted $8.8B in April 2020, from a record high of A$10.4B in March, exceeding the market expectations for a A$7.5B surplus. The decline was driven by an 11% fall in export values exceeding a 10% drop in imports.
CoreLogic Home Value Index
The national home value index fell 0.4% in May, with the capital city index down 0.5% and the regional index unchanged. This was the first monthly decline in house prices since June last year. Prices fell in the four largest capitals in the month, with Melbourne seeing the biggest decline of 0.9%. The index for Perth slipped 0.6% in the month, to be down 2.1% YoY. CoreLogic report also showed that, nationwide, transactions bounced 18.5% after a 33% slump in April.
Source: Refinitiv / FRED Source: Refinitiv / European Commission
Source: European Commission
Source: Worldometers Source: International Monetary Fund
Source: Refinitiv / Dallas Fed Note: GDP-Weighted Average
Source: Oxford University / Markit Source: Bloomberg
Source: OpenTable Source: ADP
Source: Refinitiv / Bloomberg Source: Refinitiv
Market WATCh Weekly 5 June 2020
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Key Economic Events
This Week Event Actual
Market
Forecast Previous Comment
Mon 01 AU AIG Manufacturing PMI (May) 41.6 - 35.8 A slightly slower rate of contraction (<50). AU CoreLogic National House Prices (May) -0.4% - 0.3% Index down in five of the eight capitals. CH Caixin Manufacturing PMI (May) 50.7 49.6 49.4 Indicates a slight expansion. US ISM Manufacturing PMI (May) 43.1 43.0 41.5 Rate of contraction in services has slowed.
Tue 02
AU Current Account Balance (Q1) A$8.4B A$6.1B A$1.7B Biggest surplus on record. AU RBA Board Meeting 0.25% 0.25% 0.25% Governor Philip Lowe more upbeat.
Wed 03
AU AIG Construction Index (May) 24.9 - 21.6 The outlook is bleak for Aussie construction. AU Real GDP (Q1) -0.3% -0.4% 0.5% First recession in almost 30 years now certain. AU Dwelling Approvals (Apr) -1.8% -10.7% -2.6% No impact from COVID-19 as yet. CH Caixin Services PMI (May) 55.0 47.5 44.4 Suggests the fastest expansion since 2010. EZ Unemployment Rate (Apr) 7.3% 8.2% 7.1% Government support masking the job losses. US ADP Employment Report (May) -2.8M -9.5M -19.6M Still horrific but much better than expected. US ISM Non-Manufacturing PMI (May) 45.4 44.0 41.8 Suggests a slower rate of contraction.
Thu 04
AU Trade Balance (Apr) A$8.8B A$7.5B A$10.4B Second biggest surplus on record. AU Retail Sales (Apr) -17.7% -17.9% 8.5% A record fall as expected. EZ ECB Decision -0.50% -0.50% -0.50% ECB almost doubles its QE program to €1.350T. US Trade Balance (Apr) -US$49B -US$40B -US$42B Exports fell 20% and imports were down 14%. US Initial Jobless Claims (w/e 30 May) 1,877K 1,833K 2,126K First week below 2M since early March.
Fri 05
AU AIG Services PMI (May) 31.6 - 27.1 Rate of contraction eased but still very soft. Tonight
US Non-Farm Payrolls (May) - -7.5M -20.5M Many of these jobs will take a long time to return. US Unemployment Rate (May) - -19.1% 14.7% Likely to be a fresh post-1930s peak.
Event WATC Forecast
Market
Forecast Previous Comment
Mon 08 JP GDP (Q1) - Final - -0.5% -0.9% Upward revision expected.
Tue 09
AU ANZ Job Ads (May) - - -53.1% April was the lowest level since the 1990s. AU NAB Business Conditions (May) - - -34 April was the lowest level since the early 1990s. AU NAB Business Confidence (May - -46 Hit a record low in April. EZ GDP (Q1) - Final - -3.8% 0.10% Initial estimate -3.8% but worst to come in Q2.
Wed 10
AU Westpac Consumer Sentiment (Jun) - - 16.4% Big rebound in May but level still pessimistic.
AU New Home Loans (Apr) - -12.5% 0.2% Outlook appears weak. CH CPI YoY (May) - 2.6% 3.3% Falling back as food prices ease. CH PPI YoY (May) - -3.2% -3.1% Deflation driven by soft commodity prices. US CPI YoY (May) - 0.2% 0.3% US CPI weighed down by declining oil prices. US FOMC Decision - 0.10% -0.10% Already a wide range of stimulus in place.
Thu 11
US PPI YoY (May) - -1.3% -1.2% Inflation pressure is very weak.
Fri 05
EZ Industrial Production MoM (Apr) - -20% -11.3% Another record fall expected.
US UoM Consumer Sentiment (Jun) - Prel. - 76.0 72.3 Starting to stabilise but at a low level.
