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Australia Today - GDP doesn't resonate as stocks and the Aussie dollar fall again

Market Analysis /
Greg McKenna / 06 Sep 2018

Welcome to my Australia Today column where I'll have a look at some economics, the Aussie dollar, and the outlook for the ASX200 and SPI. 

As every Feedback is welcome

THE AUSTRALIAN DOLLAR

USD weakness and a little rally in copper seems to have helped the Aussie which sits at 0.7193, up 0.22%.

The Aussie has underperformed the Euro move in the past couple of days as concerns over the EM criis persist. So we are back to the machinations of the copper market as a better guide to the short term movements of the Aussie dollar - that's based on the Aussie and copper's linkage through to worries about global growth. At least on a 10 minute time frame over the past 30 days.

Click on me, I'll expand
Click on me, I'll expand

So if the pressure is released on EM, if copper rises, and if the improvement in the spread between Australian and US 10 year bonds is any guide then the AUDUSD has some catching up to do. 0.7240/50 maybe even 73 cents could eventuate. But clearly, this is a conditional probability.

And one heavily weighted on the results of US data releases in the next couple of days. 

Looking at the daily chart we had a bearish engulfing day followed by a positive day but after a new low for this run was established. That could be the sign a bottom is building short term. But we’d need to see the 0.7235 high from two days ago give way to open up a bigger topside move.

Click on me, I'll expand
Click on me, I'll expand

ASX INDEXES

After losing more than 60 points yesterday and closing on important technical support at 6,230 in ASX 200 terms SPI traders have found another 25 points of losses overnight. At 6,190 the SPI is now below both supports I highlighted yesterday and in danger of a much bigger fall.

As I tweeted yesterday afternoon, “interesting close for the #ASX and #SPI200 as prices are offered across the region today and as both slip to/through support”. At 6,230 the ASX200 is through the uptrend channel and right on the recent low, I was using as confirmation for the break.  

The SPI, on the other hand, has broken the uptrend and the recent low. That changes the outlook somewhat. So here’s the weekly chart for context, 6100 looks like a tractor beam and important support. A break opens, 6,000/6,020.

Click on me, I'll expand
Click on me, I'll expand

A LITTLE ON THE ECONOMY

I won’t bother you with all the stats on Q2 GDP other than to say the 0.9%, 3.4% outcome was very strong. It suppots the RBA’s recently upgraded outlook for growth. And it means the chances of a rate cut are zero for a while. Indeed historical relationships would suggest rates should be soon rising as this chart a mate sent me from the CBA suggests.

CBA Economics
CBA Economics

Let me state for the record, the acceleration in growth in qoq terms and yoy terms is positive. The lift in real and nominal growth in recent quarters is also positive. And I would hope we can extend this run of economic sunshine that has now taken Australia into its 28th year of growth, into a 29th and beyond. I hope to be wrong on my glass half full outlook.

So with all that established, it’s worth noting a few folks pinged me over email and DM about the strength of yesterday’s release in Q2 GDP. There was a bit of, “you’re an idiot” or “you may have the wrong end of the stick” about some of the exchanges. That’s cool, I often accused of having got the wrong end of the stick. It's been going for more than 2 decades. 

And, I’ll tell you, dear readers, what I told them. “do you remember what I wrote earlier this week”? Tuesday I think. Recall I said, “I wanted to highlight GDP is a rear view mirror look at the road behind us” and I want to focus on the road ahead.

That is where my concern lies.

To again reiterate what I said Tuesday, “house prices, retail sales, employment – the future has darkened”. House prices are the key. But yesterday’s GDP also showed that household savings rate is down at 1%. And if wealth – house prices – reverses I’d expect the savings rate to rise once more. So the question, even if you are less troubled than me but recognise house prices may still fall, is whether this is as good as it gets.  

That's something the Kouk highlighted on Twitter this morning. We all hope that the drivers of growth can hold up. No one seriously wants the economy to go into a funk, for people to lose their jobs. I've been through one of those in my adult working life and they are not fun. 

Source: Twitter Screenshot
Source: Twitter Screenshot

As the Kouk says - stay tuned indeed. 

DATA:

On the day today we get Australian trade data for July, South Korean current account, and German factory orders before the release of the Challenger and ADP precursors to tomorrow night’s non-farms. We also non-farm productivity, the Markit and ISM services PMI’s and factory orders. Not to mention the EIA crude data.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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