Optimism Returns to the Markets

6th of September, 2019

After a week of soft local and offshore data optimism returned to the markets overnight with a 10bps lift in US bond yields.

For several weeks now, with a stream of increasingly soft data releases and an ongoing haze of geopolitical uncertainty in the market, bond yields both local and abroad have been declining. With news out of China last night that they are intending to return to negotiating table, the markets around the globe had a positive tone.

It now appears the Chinese will look to delay any escalation in trade tensions until after their 70th anniversary celebrations of the founding of the People’s Republic of China in the first week of October.

Whilst this positive tone are good for the domestic outlook, of concern for the RBA is the appreciation we saw in the AUD overnight which is now back above 0.68 US cents. Given this is a key transmission channel for monetary policy, substantial appreciation in the dollar would weaken the effect of future cuts to the cash rate as is still expected by the market.

ABS Trade Balance data was mixed yesterday with the surplus moving back slightly from successive record highs with the second highest surplus ever at $7bln. Within the data, total export whilst still up 15.9% y/y had a softer month with only 0.6% growth. Weighing on export growth was a declining in mineral and coal exports although this was somewhat offset but 4.6% growth in LNG exports.

Importantly, we saw a good reading in the import component, up 2.9% for the month supported by a 4.5% m/m growth in consumption goods and a 5.1% m/m growth in intermediate goods. These are important factors for the domestic outlook and will be viewed positively by the RBA who are looking for any sign the average consumer is interested in spending again.

Matthew Dunshea

Client Relationship Manager