Trader's thoughts - The long and short of it
Australia’s remarkably weak growth figures captured attention, both locally and abroad. The numbers conveyed in yesterday’s GDP were truly disappointing.
Australian data draws global interest
Australia’s remarkably weak growth figures captured attention, both locally and abroad. The numbers conveyed in yesterday’s GDP were truly disappointing. Growth in the final quarter of 2018 was a paltry 0.2%, and after another set of revisions to previous data, the annualized growth rate fell to 2.3%. Each figure was quite an undershoot of expectations: for one, economists were expecting the quarterly number to come-in-at 0.3% in seasonally adjusted terms. Now, on the face of it, this may not seem too bad. However, this estimate had been revised down several times in the week preceding yesterday’s GDP release, from around 0.6%, in response to other underwhelming Australian economic data.
RBA’s dissolving logic
As it stands, the picture the GDP print painted of the Australian economy blows the RBA’s base case out of the water. Recently, the RBA had become candid in its assessment of the (let’s say) “crosswinds” in the domestic economy. So cognizant of the risks, they’d adopted a “neutral” stance to monetary policy moving forward into 2019. But still, their optimism remained: growth would remain strong enough to lead to an even tighter labour market, which would eventually feed into a pick-up in wages growth, and subsequently the inflation and consumption growth long-missing in the Australian economy. It was this view that fundamentally created the bedrock for the RBA’s policy bias and supported their hope for improved local economic conditions.
A further slowdown expected
It’s seems impossible that the RBA could maintain this base case anymore. Simply put: a growth rate where it is now cannot sustain the necessary tightening of the labour market to put the aforementioned process into motion. Historically, GDP has had to grow at a rate at least above 2.5% to see adequate growth in employment. A growth-rate below this market has traditionally led to an increase in the unemployment rate – a phenomenon that, given we are (arguably) at nominally full-employment now, may well manifest quickly in future labour market data. With that credible assumption made, the elusive growth in wages is terribly unlikely to materialize, meaning the Australian economy is unlikely to meet the RBA’s expectations.
2 RBA rate cuts possible in 2019
The logic hasn’t been missed by market participants. Immediately following yesterday’s news, traders swiftly priced in the new, less-optimistic outlook for the Australian economy. Bets on a rate cut from the RBA before year’s end spiked. Implied probabilities are now suggesting at least 1 cut from the central bank in 2019. The chances of another cut after this also showed for the first time in pricing – at implied odds of about 25%. Naturally, the bears swarmed the AUD/USD as a consequence. Support at 0.7050 broke, after being tested a handful of times during the day, as the spread between 2 Year ACGBs and 2 Year US Treasuries widened to as far as 88 basis points.
Lower yields, lower currency, higher ASX
Not that the ASX was overly perturbed by what was happening in the currency and bond markets in response to the GDP figures. If anything, it was a welcomed development, just in the short-term, for stocks. The depreciation of the AUD, coupled with the tumble in bond yields, bolstered equities, leading the ASX 200 above 6230 resistance, to close 0.75% higher for the day. It was a broad a based rally too: every major sector was in the green, led by the cyclical materials, energy and industrials stocks, which have also been given a boost by the run up in oil and industrial metals prices. The next conspicuous level to watch from here likely becomes 6310.
Wall Street struggles
For the day ahead, SPI Futures are currently indicating an 8-point jump at the open for the ASX200. If realized, it’ll be no thanks to the lead Wall Street is likely to hand us. With less than hour to go in trade, the S&P500 has pulled further away from its formidable resistance level at 2815, to be trading 0.5% lower on the session. Momentum is building to the downside for US equities still: the MACD and RSI are both pointing to a market that’s lost its drive. Also, of slight concern is breadth and conviction of Wall Street’s overnight falls. Volumes are above average, while only 20% of stocks are higher for the session.
The currency complex
The anti-risk, anti-growth bent to trade overnight has brought out some of the typical doomsayers. The result has been a modest lift to the US Dollar, and at that, the Japanese Yen, while gold keeps grinding lower. Across the currency complex, commodity currencies have been the worst performing. The AUD, for the reasons earlier described; but also, the Kiwi and CAD, too – the latter in part due to a dovish Bank of Canada last night, and a dip in oil prices. The Euro is steady as it treads water ahead of tonight’s ECB meeting, at which that central bank is expected to cut its growth outlook. The Pound is ambling as further Brexit developments are awaited.
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
Seize your opportunity
Deal on the world’s stock indices today.
- Trade on rising or falling markets
- Get one-point spreads on the FTSE 100
- Unrivalled 24-hour pricing
See opportunity on an index?
Try a risk-free trade in your demo account, and see whether you’re on to something.
- Log in to your demo
- Try a risk-free trade
- See whether your hunch pays off
See opportunity on an index?
Don’t miss your chance – upgrade to a live account to take advantage.
- Get spreads from one point on the FTSE 100
- Trade more 24-hour indices than any other provider
- Analyse and deal seamlessly on smart, fast charts
See opportunity on an index?
Don’t miss your chance. Log in to take your position.
Live prices on most popular markets