Market Watch, Sept. 8

Australian GDP, retail sales and trade balance keep the optimists and pessimists happy.

The first week of a new month is always a big week, and this month has not been an exception.

Three major central bank meetings, a range of economic data and some high-level geopolitical tensions for good measure.

Putting the Korean peninsula tensions to one side, the week can be broken down into Australian data and central banks.

Australian economic data:

GDP: There was enough interest for both the pessimist and optimist in the GDP figures on Wednesday. Australia logged 26 straight years without a technical recession. We logged a very strong quarter-on-quarter growth rate of 0.8 per cent in the second quarter compared to 0.3 per cent in the first quarter, seeing the year-on-year growth rate to 1.8 per cent. However, 0.6 per cent of the 0.8 per cent growth was due to government spending, which is clearly covering over the cracks of consumption which is near enough to 0 per cent. Household saving is falling off a cliff (not good for consumption in Q3 and beyond) and private investment is still contracting. The conclusion: a pass print, but nothing more.

Retail sales and trade balance: Anaemic retail sales figures. July saw just 0.3 per cent growth versus 0.4 per cent in June, and signs for August are to the downside as consumer confidence moved to pessimism. Retail sales are a leading indicator for consumption and this could be a drag for third-quarter growth if the trend continues. The trade balance was a little weaker than forecasted, however this was due to a higher $A in July. This impacted the price of commodities, which wasn't offset by the higher volumes in July – however the surplus is still solid at $758 million.

Central Banks:

RBA: As expected no major changes. The cash rate remains welded to 1.5 per cent, and despite a few tweaks to the statement by and large the RBA is comfortable with its current stance and forecasts.

Bank of Canada: The RBC caught the market and most economists off guard by increasing the official cash rate by 25 basis points to 1 per cent. The market was only pricing in an 18 per cent chance of a rate rise, with only two out of 20 economists forecasting a rate rise. The rise in rates actually impacted the $A as it's now speculated that the RBA may follow suit and raise rates as business spending and commodity prices are putting an upside in economic growth.

The European Central Bank: The bank that was expected to be the most exciting for the week turn out to be just a little boring. Mario Draghi and Co. held the line on current policies and forecasts. It also announced a linear path on changes to policy, with October the month it will announce its policy for normalising the balance sheet (tapering QE) and December the month it will outline the normalisation of its rates stance. This will give the market the ability to price all this in a very orderly way, making the ECB meetings a ‘non-event'.

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