Market WATCh Weekly 22 May 2020

FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au

Financial Markets Overview

Interest Rates

It has been a quite choppy week in fixed income markets, yet yields were little changed on balance. Australian 10-year government bond yields picked up to around 1% on Tuesday after press reports on encouraging results in early trials of a SARS-COV-2 vaccine. For the rest of the week, however, long-term Australian government bond yields trended lower, dragged down mainly by a rise in fears over US-China trade tensions. 3-year yields were stable, in line with the RBA target. With yields relatively steady, the RBA stayed out of the market for the second week in a row.

Long-term yields in other advanced economies are also slightly higher than a week ago, with yields for UK gilts being a notable exception. 2- and 5-year gilt yields turned negative this week after the Bank of England Governor did not rule out negative central bank interest rates in the UK. On Wednesday, the UK Debt Management Office sold 3-year gilts at a slightly negative rate.

In his public appearance on Thursday, the RBA Governor dismissed the case for negative interest rates in Australia.

Equities

Trade on global equity markets was buffeted this week by news of a promising vaccine trial, geopolitical concerns, and expectations for further government stimulus.

Most of the major indices have gained this week despite the volatility, with the S&P 500 at its highest levels in 11 weeks.

Domestically, the ASX 200 is also at its highest levels since early March. However, news of a change in Chinese customs arrangements for the inspection of iron ore imports caused a bit of uncertainty around the outlook for Aussie miners midweek. Yet, this was not enough to reverse the big rises seen early in the week with miners among the best performers over the past five days, behind only energy sector shares.

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This Week’s Highlights

The RBA Board meeting minutes suggested that the central bank is content for the time being to keep policy unchanged, sit back, and see how things evolve. The weekly payrolls and wages report indicates that the Aussie labour market is stabilising. The CBA flash PMIs for May remained weak but suggest activity declined at a slower pace.

Flash PMIs for Japan, Europe and the US indicated a slower pace of contraction in May, though conditions remain depressed.

Next Week’s Highlights

Highlights in Australia next week will be the Q1 construction work done report on Wednesday, Q1 private sector capital expenditure on Thursday and RBA’s private sector credit for April on Friday.

In the US, the Fed’s summary of the US economy, the Beige Book, will be released on Wednesday, the second estimate of Q1 GDP and the durable goods report for April are due on Thursday, while personal consumption and inflation for April are due on Friday.

For further information, please contact:

Craig McGuinness Chief Economist cmcguinness@watc.wa.gov.au (08) 9235 9104

Patrycja Beniak Economist pbeniak@watc.wa.gov.au (08) 9235 9110

Source: RBA, WATC

Weekly Weekly Weekly Weekly

Change Change Change Change Australia 0.25 (0 pt) O/N Interbank Cash 0.13 (0 pt) USD 3-month

Libor

0.36 (↓3 pt) ASX200 5534 (↑181 pt)

US (IOER) 0.10 (0 pt) 90-day Bills 0.10 (0 pt) 2-yr T-Notes 0.21 (↑1 pt) S&P500 2949 (↑96 pt)

Eurozone (Deposit) -0.50 (0 pt) 3-yr T-Bond 0.26 (↑1 pt) 10-yr T-Notes 0.66 (↑3 pt) DJIA 24474 (↑849 pt)

UK 0.10 (0 pt) 10-yr T-Bond 0.90 (↓1 pt) Jap 10-yr 0.00 (↓0 pt) Nikkei 20474 (↑620 pt)

Japan -0.10 (0 pt) WATC 2023 0.53 (↑1 pt) UK 10-yr 0.18 (↓5 pt) CSI300 3875 (↓45 pt)

China (1Y LPR) 3.85 (0 pt) WATC 2029 1.38 (↑1 pt) Ger 10-yr -0.49 (↑4 pt) Stoxx600 343 (↑16 pt)

Central Bank Rates (%) Major Overseas Global Equities

Interest Rates (%)

Australian

Interest Rates (%)

Source: Refinitiv

Market WATCh Weekly 22 May 2020

FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au

Currencies

The Australian dollar strengthened this week. The bulk of the appreciation was at the start of the week, as global market sentiment improved due to positive press reports on the trial of a SARS-COV-2 vaccine. Global market sentiment deteriorated later in the week amid re-escalation in US-China tensions, putting the Aussie’s appreciation to a halt.

Developments in the Australian dollar’s exchange rate versus the greenback mirrored trends in other G10 exchange rates. All G10 currencies strengthened at the start of the week before levelling off. The Japanese yen was the only exception here, depreciating amid the improvement in sentiment early in the week, before stabilising. The US dollar lost 1% in trade-weighted terms this week.

Commodities

News of a promising vaccine trial, the tentative opening of some economies and news of recovering Chinese demand for commodities pushed prices higher again this week.

Oil prices again led the way, boosted by news that Chinese oil consumption had risen to about 13 million barrels a day, close to where it was this time last year. Production cuts and signs of improved demand has seen a barrel of Brent crude more than double in price over the past month.

Iron ore prices have added to their recent gains as rising COVID-19 infections in Brazil raised doubts about the outlook for iron ore production in the world’s second biggest producer.

Escalating geopolitical tension and ongoing monetary support from central banks continues to boost gold prices, which hit a fresh 7.5-year high this week.

Current High Low Change 52-Week High 52-Week Low

Gold (US$) $1,726.28 $1,764.55 $1,691.70 (↑$9.01) $1,764.55 $1,272.18

Brent Crude Oil (US$) $35.57 $36.98 $30.94 (↑$5.7) $72.52 $15.98

Mogas95* (US$) $38.15 $38.20 $31.20 (↑$8.4) $83.55 $15.80

WTI Oil (US$) $33.51 $34.66 $27.24 (↑$9.51) $65.65 -$40.32

CRB Index 130.52 132.01 120.14 (↑7.93) 187.87 101.48

Iron Ore Price 62% Fe (US$) ** $95.56 $95.80 $88.70 (↑$12.75) $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

Spot rates Current High Low Change 52-Week High 52-Week Low

AUD/USD 0.6561 0.6616 0.6399 (↑109 pt) 0.7082 0.5506

AUD/EUR 0.5992 0.6018 0.5916 (↑21 pt) 0.6291 0.5046

AUD/GBP 0.5365 0.5397 0.5268 (↑80 pt) 0.5693 0.4790

AUD/JPY 70.58 71.08 68.60 (↑1.37 pt) 76.52 59.85

AUD/CNY 4.6668 4.6926 4.5441 (↑859 pt) 4.8982 3.8915

EUR/USD 1.0947 1.1008 1.0787 (↑144 pt) 1.1492 1.0635

GBP/USD 1.2228 1.2295 1.2073 (↑22 pt) 1.3514 1.1404

USD/JPY 107.59 108.08 106.84 (↑0.32 pt) 112.21 101.17

USD/CNY 7.1141 7.1192 7.0699 (↑141 pt) 7.1844 6.8311

Forward Rates Spot 3M 6M 12M

AUD/USD 0.6561 0.6562 0.6561 0.6558

AUD/EUR 0.5992 0.5981 0.5968 0.5937

AUD/GBP 0.5365 0.5364 0.5361 0.5351

AUD/JPY 70.58 70.51 70.39 70.07

AUD/NZD 1.0721 1.0727 1.0730 1.0731

AUD/SGD 0.9303 0.9297 0.9288 0.9274

Source: Refinitiv

Market WATCh Weekly 22 May 2020

FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au

Domestic Economy Weekly Payroll Jobs and Wages (w/e 2 May)

Payroll jobs fell 1.1% in the week ending 2 May, following a 0.9% rise the previous week, to be down 7.3% since 14 March when Australia recorded its 100th COVID case. The stabilisation has been driven by the implementation of the JobKeeper scheme, which has tied employees to their workplace even if they have worked zero hours. JobKeeper has also been the driver of the 1.4% increase in total wages since mid-April low point. Wages were down 5.4% since 14 March.

Accommodation and food services (-27.1%), along with arts and recreation (-19.0%), have seen the biggest job losses since 14 March. In recent weeks, however, jobs and total wages have increased somewhat in these sectors.

By age group, the under 20s have seen the biggest fall in jobs (at 14.6%) but also a 16.8% rise in total wages. This suggests that those in this age group who have remained on the books of their employers have, on the whole, done quite well out of JobKeeper.

Western Australia has seen the smallest decline in payrolls among the states with a 5.9% drop since 14 March, yet the fall in total wages, at 7.0%, was the biggest of all states.

Westpac - Melbourne Institute Leading Index (Apr)

The six-month annualised growth rate in the leading index, designed to forecast growth in the next three to nine months, fell from -2.34% to -5.16% in April (trend growth = zero). This is the weakest reading since the GFC. The pace of decline is unprecedented and the index is lower than it was in both the early 1980s and early 1990s recessions. While the current slump will most probably be short and sharp, the recovery to former levels of activity is likely to take a lot longer than in previous downturns.

Internet Job Vacancies (Apr)

The Federal government’s internet job vacancy index plunged again in April, falling 42.2% in seasonally adjusted terms, following a 24.2% drop in March to be 61.6% lower than a year earlier.

Vacancies were down across all the states and all occupational groups. The annual drop in vacancies was heaviest in trend terms in New South Wales (-51.6%) and Victoria (-50.0%), while Western Australia saw the lowest annual fall (-35.6%).

CBA Flash Composite PMI (May)

The flash estimate of the composite PMI increased to 26.4 in May from 21.7 in April, indicating that while business conditions remained very depressed they contracted at a slower pace (<50 = contraction). The services sector (25.5) continues to be more depressed than manufacturing (42.8), with both sectors reporting ongoing declines in employment. On a positive note, business confidence regarding the outlook improved. However, activity is likely to remain depressed for some time even after it starts to lift.

Preliminary Retail Sales (Apr)

Retail sales plunged a seasonally adjusted 17.9% in April, the biggest one-month fall in the history of the series. The slump follows the record 8.5% increase in March, which was driven by stockpiling ahead of the COVID-19 lockdown.

Source: ABS

Source: Bloomberg

Source: Refinitiv / WATC

Market WATCh Weekly 22 May 2020

FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS www.watc.wa.gov.au

Global Economy

Source: Datastream Source: Datastream

Source: Datastream

Source: Bloomberg Source: Bloomberg

Source: Datastream

As the advanced economies come out of lockdown, the pace of contraction in services is easing...

… but in the manufacturing sector the recovery is less obvious.

Conditions are improving also across the US regions...

… following a historic contraction in the US economic activity.

However, situation in the advanced economies is still far from normal…

… as the labour market in the advanced economies continues to struggle.

Source: Japanese Customs

Source: Markit, Jibun Bank, CBA Source: Refinitiv

Source: Refinitiv

Source: Refinitiv, NBER Source: Refinitiv

Source: Oxford University

Source: Refinitiv Source: Refinitiv

Source: Markit Source: Markit

Source: Refinitiv Source: ONS

Source: Refinitiv Source: Philadelphia and New York Fed

Market WATCh Weekly 22 May 2020

Office Address: Level 12, St Georges Square, 225 St Georges Terrace, PERTH WA 6000

Postal Address: PO Box 7282, Perth Cloisters Square, WA 6850

Telephone:(08) 9235 9100

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DISCLAIMER: Any opinions, judgments, conclusions, forecasts, predictions or estimations contained in this advice are made in reliance on information provided to Western Australian Treasury Corporation which Western Australian Treasury Corporation believes to be reliable. Western Australian Treasury Corporation, however, cannot guarantee the accuracy of that information. Thus, any recommendations are made in good faith but are provided only to assist you with any decisions which you make.

Key Economic Events

This Week Event Actual

Market

Forecast Previous Comment

Mon 18 JP Real GDP QoQ (Q1) - Preliminary -0.9% -1.1% -1.9% Japan’s first technical recession since 2015.

Tue 19

AU RBA Board Minutes - - - RBA concerned about commercial property. AU Weekly Payrolls (w/e 2 May) -1.1% - 0.9% Labour market appears to be stabilising. AU Total Wages (w/e 2 May) 0.9% - 0.5% JobKeeper boosting wages. UK Unemployment Rate (Mar) 3.9% 4.3% 4.0% Set to rise sharply in the coming months.

Wed 20

AU Westpac Leading Index (Apr) -5.16% - -2.47% Biggest one-month drop in history. AU Internet Job Vacancies (Apr) -42.2% - -24.2% Vacancies down almost 62% from a year ago. AU Preliminary Retail Sales (Apr) -17.9% - 8.5% Biggest fall on record. US FOMC Minutes - - - Yield curve control discussed as a policy option.

Thu 21

AU CBA Composite PMI (May) - Flash 26.4 - 21.7 Still at a recessionary level (<50 contraction). JP Composite PMI (May) - Flash 27.4 - 25.8 Weak but a slightly slower rate of contraction. JP Adjusted Trade Balance (Apr) -¥719B -¥996B -¥381B Exports down 22% YoY. EZ Composite PMI (May) - Flash 30.5 21.7 13.6 Conditions weakening at a slower rate. US Composite PMI (May) - Flash 36.4 - 27.0 An improvement but still very soft. US Philadelphia Fed Index (May) -43.1 -40.0 -56.6 Conditions deteriorated at a slower rate. US Initial Jobless Claims (w/e 16 May) 2,438k 2,400k 2,687k Takes total job losses to 38.6M in nine weeks.

Fri 22

JP CPI YoY (Apr) 0.1% 0.2% 0.4% Japan heading back to deflation. JP Bank of Japan Decision -0.10% -0.10% -0.10% 10-year yield target remained at zero.

Event WATC Forecast

Market

Forecast Previous Comment

Mon 25 AU Preliminary Trade Data (Apr) - - - Early estimate of merchandise trade in April.

Tue 26

AU ANZ Weekly Consumer Conf. (24 May) - - 92.3 Has improved as lockdown measures eased. US Chicago Fed Nat. Activity Index (Apr) - - -4.2 Index likely fell to a record low in April. US Consumer Conference Index (May) - 87.0 86.9 Confidence currently at a six-year low.

Wed 27

AU Construction Work Done QoQ (Q1) - -1.0% -3.0% Has fallen in five out of six quarters. US Beige Book - - - Federal Reserve summary of the US economy.

Thu 28

AU Private Sector Capex QoQ (Q1) - -1.0% -2.8% Likely to show a big drop in investment plans.

AU Business Impacts of COVID-19 (18 May) - - - Survey on the impact of COVID-19 on business. US GDP Annualised (Q1) - 2nd Estimate - -4.8% -4.8% Captures the early days of the COVID-19 crisis. US Durable Goods Orders MoM (Apr) - -18.0% -14.7% Another big drop expected. US Initial Jobless Claims (w/e 16 May) - - 2,438k Total job losses 38.6M in nine weeks.

Fri 29

AU Private Sector Credit MoM (Apr) - 1.0% 1.1% March was boosted by business borrowing. AU Household Impact of COVID (16 May) - - - The 4 May report saw 46% working from home. US Private Consumption MoM (Apr) - -12.6% -7.5% Will likely be a record one-month fall. US PCE Price Index MoM (Apr) - -0.7% -0.3% US getting close to deflation. US UoM Consumer Conf. (May) - Final - 73.7 71.8 Advance estimate was 73.7.