Morning comment: Aussie GDP disappoints

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
Despite some better service sector surveys from the US, Europe and Japan, and the earlier indications that there will be some additional macro policy stimulus in China, equity markets struggled for direction yesterday with the S&P500 closing down a modest 0.1% following earlier modest gains in most European markets. Moves in the bond and currency markets were also limited as investors seemingly decided to sit on their hands ahead of tomorrow’s ECB policy meeting and Friday’s US employment report. And given the lack of direction from Wall Street, markets have been quite mixed today in Asia.

While there were no new domestic data to influence the mood, equity markets closed down in Japan, where the TOPIX fell 0.25%. JGB yields fell slightly more than 1bp across the middle of the curve as the BoJ upped its buying of 5-10Y bonds by ¥50bn (to ¥480bn) at its scheduled operation, consistent with its March plans announced last week. Meanwhile, during a wide-ranging speech in Yamanashi, dovish BoJ Board member Yutaka Harada pledged that the BoJ would take action without delay if the downside risks to the economy and inflation materialise. He said that the risks include those associated with the looming consumption tax hike – which he said could push the economy into recession (although subsequently clarified that recession was not his baseline view) – and the recent weakening of stock prices, as well as developments in the global economy and especially the outlook for China. Elsewhere in the Asia-Pacific, a late rally in China on policy hopes saw the CSI300 close up 0.8%, with stocks up in Hong Kong and Taiwan too. But, the Australian bond curve rallied a substantial 6-7bps and the Australian dollar fell after today’s Q4 GDP report failed to live up to even the market’s substantially downgraded expectations (more on this below).

EU/UK:
Looking ahead – in the absence of any leaks from the ECB on what to expect from the Governing Council tomorrow – today is set to be uneventful for economic news from the euro area and UK, with no top-tier macro data due for release. However, BoE MPC members Cunliffe and Saunders will speak publicly. And the flow of unsubstantiated Brexit rumours will, of course, continue, although little of substance is likely to emerge from the ongoing negotiations in Brussels. Indeed, the talks look set to drag on into the weekend, with the UK in due course highly unlikely to gain the kind of concessions required to persuade the hardline Brexiters to back May’s (likely modestly-elaborated) deal. And with the government proposals aimed at turning the heads of Labour MPs from Leave-voting constituencies – i.e. new funds for ‘left-behind’ towns and assurances on workers’ rights – receiving short shrift from the opposition and unions, we continue to expect May to lose Tuesday’s meaningful vote, opening the way to an extension of the Article 50 deadline beyond 29 March.

US:
In the US, ahead of Friday’s official labour market report, attention today will be on the ADP employment report, which is expected to suggest that non-farm payrolls in the private sector increased 190k in February. In addition, the full trade report for December is expected to mirror the awful goods trade report, with the headline deficit expected to leap to close to $58bn, which would be the largest since 2008. The Fed’s latest Beige Book is also due for release today while FOMC members John Williams and Loretta Mester will be speaking publicly.

Australia:
The domestic focus in Australia today was on the release of the national accounts for Q4 and a speech by RBA Governor Philip Lowe.

Beginning with the national accounts, the news was disappointing with real GDP rising just 0.2%Q/Q – even less than the market’s downgraded expectation of 0.3%Q/Q after this week’s further soft partial indicators. This marked the weakest quarter since Q316 and caused annual growth decline to slow to an 18-month low of 2.3%Y/Y – well short of the 2¾%Y/Y that the RBA had estimated in the February Statement on Monetary Policy.

In the detail of the expenditure measure, domestic demand rose just 0.3%Q/Q – also the weakest quarter since Q316 – in part due to 3.4%Q/Q decline in residential building activity and a 0.3%Q/Q decline in non-residential construction. That said, household consumption rose just 0.4%Q/Q – barely above the growth recorded in Q3 – so that annual growth slowed to 2.0%Y/Y. The household savings rate edged up 0.2ppt to 2.5% after falling to an 11-year low last quarter. As indicated by yesterday’s releases, public consumption rose 1.8%Q/Q and public investment rose 0.3%Q/Q.

While construction declined, however, investment in machinery and equipment rose 0.6%Q/Q (up 4.2%Y/Y) and investment in intellectual property rose 1.8%Q/Q (7.5%Y/Y). But exports fell 0.7%Q/Q – nominal growth was driven by higher prices – and imports rose 0.1%Q/Q, so that net exports made a small negative contribution to growth. Inventories added 0.2ppt to growth in Q4, however. Elsewhere in the accounts, nominal GDP rose 1.2%Q/Q in Q4 was up 5.5%Y/Y, reflecting the lift in the terms of trade – most of which is accruing to the corporate sector. The GDP deflator thus rose 1.0%Q/Q but the domestic final demand and household income deflators rose a meagre 0.3%Q/Q.

Turning to Lowe’s speech, delivered just ahead of the national accounts report, the Governor stated that a key issue for policy remains developments in the labour market, especially given the lack of other obvious drivers of higher inflation at the moment. Specifically, he reiterated that the Bank is expecting the labour market to tighten, causing wage growth to increase further. In turn, this is expected to boost household income and spending, providing a ‘counterweight’ to the fall in house prices, and so put upward pressure on inflation. In that regard he described recent employment, vacancy and wage data as encouraging. That said, he acknowledged that other indicators paint a softer picture, creating a growing tension between strong labour market data and the softer GDP data (not a situation unique to Australia by any means).

Lowe stated that how the tension between the labour market and output indicators resolves itself will be one of the issues that the Board will be assessing over coming months. In a repeat of language used following the last Board meeting, Lowe concluded by noting that there are plausible scenarios under which the next move in interest rates is up – although he thought it hard to see one that would require a rate hike this year – and also plausible scenarios under which it is down. At least prior to today’s national accounts release, the probabilities continued to be described as “reasonably evenly balanced.” Finally, it is worth noting that the bulk of this speech dealt with the Australian housing market and its likely impact on the economy. For those interested in this subject the speech is well worth a read and is available on the front page of the RBA’s website at www.rba.gov.au.

New Zealand:
The QV house price index rose 3.0%Y/Y in February, up very slightly from the 2.9%Y/Y increase reported in January. In common with other indicators the QV index continued to point to modest price declines in Auckland, but continued price increases elsewhere in the country where absolute prices are considerably cheaper.

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