Thursday, November 7, 2019

US-China partial trade pact possibly delayed to December; will RBA’s economic outlook be pessimistic?

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Market recap: US equities remain flat for second straight day

US equities remained mostly flat on Wednesday, as news of a possible delay on the first phase of the US-China trade pact dampened investor sentiment. Reuters reported that a US official said the interim trade deal could be delayed until December, as both the US and China continue to discuss over terms of the trade deal and the venue to meet (as the planned meeting at the Asia-Pacific Economic Cooperation in Chile set for mid-November was cancelled due to political unrest in the country). The DJIA stayed flat, while the S&P500 inched higher by 0.07%. The Nasdaq lost 0.29%, ending its three-day winning streak.

Safe haven assets gained on the news of the possible trade pact delay. Gold gained 0.47% and the yen strengthened 0.16% against the dollar. US Treasuries rebounded after three days of losses, with 10-year yields falling 3bps to 1.83%.

In Asia, major indices started Thursday’s trading session mixed. The Nikkei and the Straits Times Index opened the day 0.09% and 0.03% lower while the Hang Seng Index inched higher by 0.01%.

Walt Disney and Dropbox will be announcing their earnings next and the Bank of England will be announcing its decision on monetary policy later today, at 4pm (GMT +4).

For the BoE’s decision analysis, please refer to yesterday’s daily analysis report.

Today’s Analysis: Expect RBA to revise it’s economic outlook downwards

The Royal Bank of Australia’s (RBA) quarterly statement on monetary policy for November is set to be released tomorrow at 4.30am (GMT+4). The release comes after the RBA’s decision to leave interest rates unchanged at 0.75% during November’s monetary policy meeting earlier this week.

During November’s meeting the central bank reiterated its stance saying that it will continue to monitor developments and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and achievement of the inflation target over time.

The central bank’s global economic outlook remained little changed, highlighting that international trade flows and business investments continues to be affected by the US-China trade dispute. Low interest rates around the world was also a key point of November’s statement, although it noted that monetary policy easing has scaled back over the past month.

Australia’s domestic economic outlook also remained little changed. Inflation rate remains at 1.7% and is expected to increase gradually, reaching 2% in 2020 and 2021. The labour market in Australia continues to strengthen, with unemployment remaining steady at around 5.2% although wage growth remains subdued.

Recent economic data from Australia

Futures tracking RBA interest rate decisions imply that the market is pricing in a 42.1% chance for a rate cut in the RBA’s monetary policy meeting in February next year, a slight decrease from 43.3% on November 4th, a day before its decision on monetary policy for November was announced. 

We expect tomorrow’s quarterly statement to be more pessimistic. The US-China trade war will likely continue to weigh on the Australian economy, as the Australia is largely dependent on both superpowers (China contributes to 30.6% of total exports in 2018, while US accounts for roughly 27% of foreign direct investment in 2017).

Also, September’s retail sales growth in Australia slowed down, increasing only 0.2%, below 0.4% in August and economists’ expectations of 0.5%, signaling a possible slowdown in consumer spending. Manufacturing and Services Purchasing Managers’ Index (PMI) showed continued expansion in both sectors but at a slower rate than expected. The weak economic data hints at a possible downward revision to RBA’s forecast of future GDP and inflation.

Probabilities for a future rate cut is then likely to increase, possibly to 50% for a 25bps rate cut in February. In that case, expect the Aussie to weaken against the dollar, likely to 0.6857’s level. But if the quarterly statement indicates a more optimistic outlook on the economy, then the AUD/USD will likely rise to 0.6887’s level.

RBA quarterly report on monetary policy likely to show downward revision on economy

The bulls and bears fight for possession of the Aussie after the RBA’s decision to leave rates unchanged and as conflicting reports on the US-China trade dispute surfaces. Bears will likely test the 0.6857 support level if tomorrow’s quarterly report shows increasing pessimism on the Australian economy from the RBA or if the dollar strengthens as a result of a better-than-expected consumer sentiment index data releasing tomorrow as well at 7pm (GMT +4).