Australian GDP smashes forecasts, NAFTA talks resume

Summary:

• Australian economic growth reaches its fastest pace in 6 years, services PMIs for August fall

• Chinese services and composite PMIs slide along with Asian equities

• PM Justin Trudeau says he is going to stand pat as NAFTA talks resume

Over Asian hours trading we were offered an excellent reading of Australian GDP which propelled the Aussie. The Australian economy expanded in the second quarter at the fastest pace in 6 years of 3.4% and 0.9% in annual and quarterly terms respectively. The median estimates had suggested values of 2.9% and 0.7% so the real numbers easily beat economists’ expectations. The data could be treated particularly well given weak CAPEX growth - investment spending added 0.8 percentage points to the 3.4% pick-up. The household sector again turned out to offer the largest contribution to growth of 1.75 percentage points despite low wage growth and falling house prices. Notice that the latter may have had a negative impact on households’ outlays due to a wealth effect, however, in has not been the case as of yet.

The Australian economy saw the solid rate of growth in the three months through June. Source: Macrobond, XTB Research

The release also showed a meaningful contribution of government spending to growth of 1% - the third consecutive quarter with the same contribution. It needs to be said as well that the savings rate in the three months through June stood at 1% implying that further increased outlays seem to be very unlikely in connection with an increase in credit growth taking into account dormant wage growth as well as trade-related risks, shrinking wealth. The gloomiest point was by far next exports subtracting 0.65 percentage points being a clear sign of trade frictions between the US and China as the latter is the major trade partner of the Australian economy. Finally the report showed that inventories added 0.55 percentage points to the annual growth rate reflecting the weakened exports outlook. Either way, the report might be classified as the robust one and even as this pace is unlikely to maintain over the course of the coming quarters the Reserve Bank of Australia should welcome these numbers. Nevertheless, the data does not change the current outlook for monetary policy there and a wait-and-see mode is expected to to continue at least through the first half of the next year. In addition to GDP there were also two services PMI readings and both surprised to the downside. The AiG gauge fell to 52.2 from 53.6 whereas the CBA/Markit index dwindled to 51.8 from 52.3.

Despite the solid rate of economic growth in Australia the outlook for the Aussie has not changed too much. Therefore, from a technical standpoint, it is worth taking a look at the AUDNZD cross as the pair has failed to break through 1.0980 implying a possible retreat. Source: xStation5

The Australia data were not the sole during the Asian session. We also got Chinese services PMI which slid to 51.5 from 52.8 in August falling short of the median estimate of 52.6. It was the weakest release in 10 months albeit the composite PMI managed to retain quite comfortably above the 50 mark (52) separating growth from contraction. Note that this reading was preceded by manufacturing PMI released earlier this week which also brought the slowest pace of activity growth in more than a year with export orders shrinking for a fifth consecutive month mirroring trade frictions. The weakened backdrop for the China’s services sector has weighed on Asian stocks taking a hit on Wednesday. As of 7:00 am BST the Hang Seng (CHNComp) is dropping as much as 1.8% while the Shanghai Composite is declining 0.9%. The Australian benchmark is also down 1% at the time of writing. Note that despite falls in Asia investors have yet to decide to flock into safe haven assets as the yield of the US 10Y yield has even increased modestly to 2.9%.

Lingering uncertainty related to NAFTA talks acts to the detriment of the Canadian dollar. Source: xStation5

Wednesday is the date when NAFTA talks are going to resume but investors should take into account various scenarios given yesterday’s remarks coming from Canadian PM Justin Trudeau. He said that his country will not compromise on key demands at high-level talks this week with the US. Trudeau reiterated that existing protections that ban US media companies from buying Canadian cultural industries must be maintained. Therefore, it looks that a road of further talks will not be plain but rather quite bumpy.