Today's shocking headline Q4 Australian GDP numbers question the validity of the RBA's unchanged decision yesterday


MAJOR HEADLINES – PREVIOUS SESSION

  • Canada Bank of Canada lower rates 50 bps as expected to bring the rate to 0.50%

  • US Pending Home Sales at -7.7% y/y vs. -3.5% expected

  • US ABC Consumer Confidence at -49 vs. -47 expected and -48 prior

  • AU AiG Performance of Service Index at 32.2 vs. 41.0 prior

  • CN China Feb PMI at 49.0 vs. 45.3 prior

  • UK Nationwide Consumer Confidence at 43 vs. 38 expected and revised 41 prior

  • AU Q4 GDP at -0.5% q/q, +0.3% y/y vs. +0.2%, +1.2% expected and +0.1%, +1.8% prior resp.


THEMES TO WATCH – UPCOMING SESSION

  • EU Services PMI (0900)

  • UK Services PMI (0930)

  • UK BRC Shop Price Index (0930)

  • US ADP Employment Change (1315)

  • US Fed’s Fisher speaking (1400)

  • US Non-manufacturing ISM (1500)

Market Comment:

What a shocker! While the RBA was congratulated yesterday on its move to keep rates on hold for the first time in 7 months, the GDP data today appeared to leave the central bank with egg on its face. Official statistics showed that the Australian economy contracted for the first time in eight years in the last quarter of 2008, previously having seemed immune to the economic mayhem elsewhere, with a hefty 0.5% q/q fall against 0.1% q/q growth in Q3 and market expectations of a slight improvement to +0.2% q/q. The steep decline has begun to raise questions about Q1 and talk has reverted to further rate cuts at the next meeting. However, it is worth noting that there is some discussion whether the data is actually as bad as the headline suggests. The large 2% q/q fall in private sector inventories in Q4 contributed to a 1.7% q/q decline in growth in the period and is expected to slow, or even reverse in Q1. In addition, the Australian Bureau of Statistics highlighted a statistical discrepancy, caused by the averaging of the 3 components of GDP calculations (expenditure, production and income) during the period. Government policy, the sharp fall in prices and exchange rate saw a wide disparity in the components and is reckoned to have lopped off some 0.5% from the headline q/q growth.

While leading the rest of the FX market higher yesterday after the RBA decision, the AUD tumbled a quick 75 pips and dragged other currencies along with it. Side note: The Aussie share index closed -1.64% today.

Prior to the data, RBA Assistant Governor Malcolm Edey had commented that Australia faces a borderline recession this year given that economic growth was likely to slow to near zero. It would now appear that we would require a sharp rebound in Q1 to meet his expectations. He added that the Australian economy was, however, more resilient than most but could not avoid some major short-term weakness. He noted that past fiscal efforts and lower rates would boost household incomes and continue to support demand throughout the year. In the same vein, Treasurer Wayne Swan was quick to downplay the effect of the poor number, reiterating that government stimulus measures and successive central bank cuts would moderate the impact of a downturn in Australia.

If one needed something to cling to as good news for the Australian economy, one could highlight the Chinese data that was released earlier today. The official PMI data for February showed a sharp rise from January. The index came in at 49.0, up from 45.3 in Jan and a record low of 38.8 printed last November, with improvement recorded across all categories. Hopes that the Chinese economy would continue to fire up and suck in imports from around the region are still alive, although it should be noted that the below-50 reading still points towards contraction. Nevertheless, the AUD clung to this hope and managed to rebound above the 0.63 mark after touching a 0.6286 low.

Looking back to yesterday, after the surprise no-change decision from the RBA, the Bank of Canada stuck to the market's script in announcing a 50bp rate cut to bring official rates down to 0.5% - the lowest ever rate in the country's history. In accompanying comments, the BOC appeared to open the door to keeping rates at current levels, or lower, until there were clear signs that supply in the economy was being taken up (BOC’s current projection is that this would not occur until early 2010).
In addition, it hinted that more “monetary stimulus” may be needed (indirect reference to QE) with further outlines due in April. The 1.3000 level remains the psychological target for USDCAD in these risk-aversion times.

In his testimony before Congress, Fed Chief Bernanke gave a grim view of the outlook for the US economy and the financial sector. He stated that “clearly we have not stabilized” the US banking system and suggested that the White House would have to consider increasing the scope of its $750 bln banking rescue package. He reiterated that nationalization was neither warranted nor necessary and defended the ongoing bailout for AIG, saying that there had been no alternative as its failure would have created shockwaves similar to those experienced in September 2008 (i.e. Lehman’s collapse).

The run into the US non-farm payrolls on Friday starts in earnest today with the ADP employment change numbers. With a 600k+ number touted (those are becoming the norm these days!), a 700k number would cement the current risk aversion theme.