Australia avoids technical recession as Q1 GDP data beats forecast, in positive territory


MAJOR HEADLINES – PREVIOUS SESSION

  • EU Apr. Euro-Zone unemployment out at 9.2% vs. 9.1% expected and 8.9% prior

  • US Apr. Pending Home sales out at +6.7% m/m vs. +0.5% expected and +3.2% prior

  • US Weekly ABC Consumer Confidence out at -49 vs. -47 prior

  • US May Total Vehicle Sales out at 9.9m vs. 9.4m expected and 9.3m prior

  • UK Nationwide Consumer Confidence out at 53 vs. 52 expected and revised 51 prior

  • AU May AiG Performance of Service Index out at 39.9 vs. 39.8 prior

  • AU Q1 GDP out at +0.4% q/q vs. -0.2% expected and revised -0.6% prior

  • AU Q1 GDP out at +0.4% y/y vs. -0.4% expected and revised +0.8% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Services PMI (0755)

  • EU Euro-zone Services/Composite PMI (0800)

  • UK Services PMI (0830)

  • EU Euro-zone Q1 GDP (0900)

  • EU Euro-zone PPI (0900)

  • US MBA Mortgage Applications (1100)

  • US Challenger Job Cuts (1130)

  • US ADP Employment Change (1215)

  • US ISM Non-manufacturing (1400)

  • US Factory Orders (1400)

  • US Fed’s Bernanke testifies (1400)

Market Comment:

The USD slid to fresh 2009 lows against the USD index as US pending home sales jumped 6.7% in April, the third straight gain and the fourth in the last 5 months, and well above the expected +0.5% figure. Despite the volatile nature of this particular data, it helped cement a softer tone for the dollar after the Kremlin had announced that the upcoming BRIC summit may discuss a supra-national reserve currency. (Note this was despite comments and reported feedback from US Treasury Secretary Geithner during his China trip that Chinese officials still saw the USD as a reserve currency for a long time).

It was not a dollar bear story right from the start though. Early squeezing of weak USD shorts had seen EUR and GBP both softening against the greenback, the latter particularly soft on reports that Mid-East investors would be offloading GBP3.5 bln worth of their investment in UK’s Barclays Bank. However, UK data also surprised to the upside with mortgage approvals rising to 43k and construction PMI echoing the stronger manufacturing PMI a day earlier, coming in at 45.9 and helping Sterling’s cause as the USD turned back lower.

The star of the Asian session was Australia, with the release of Q1 GDP data confounding forecasts and rising strongly. Q1 growth came in a +0.4% q/q after (upwardly-) revised forecasts of +0.2% (from -0.2%) and thus avoided a technical recession. However, note that Q4’s 0.5% contraction was revised modestly lower to -0.6% q/q. Growth was led by a solid contribution from net exports (unfortunately, and with a word of caution, only the result of a dramatic fall in imports rather than the other way round) and non-farm GDP rising by 0.5% and terms of trade falling 7.8%. In seasonally-adjusted terms the largest negative contribution came from private business investment (-1.1%) though this was more than offset by positive contributions from imports (+1.6%), exports (+0.6%) and household consumption (+0.3%). While the RBA signaled yesterday that there was further scope to reduce interest rates if necessary, the solid data will likely push this to the back of its collective mind. The AUD naturally firmed against the dollar and the crosses post-data. Australian officials were quick to jump on the positive bandwagon with Treasurer Swan commenting that the positive growth reflects resilience of the economy in the face of a global recession with fiscal stimulus measures helping demand. However both he and PM Rudd were cautious about the future, warning that the economy was not out of the woods yet and may contract in the future as it had yet to feel the full brunt of the global recession.

The more upbeat data from the UK also continued to flow today, with the Nationwide consumer confidence index rising to its best level in 6 months. This comes hot on the heels of yesterday’s date which showed mortgage approvals rising to 43k and construction PMI echoing the stronger manufacturing PMI a day earlier, coming in at 45.9. The stronger consumer confidence number reflects a growing view that measures put in place by the government and BOE are having the desired effect although the fear of unemployment continues to be a drag on spending. The confidence index rose 2 points to 53, but the expectations index jumped a much greater 5 points to 76, the highest in almost a year.