Australian GDP Shrinks for First Time in Years

Daily Analysis - 07/12/2016

Economy Suffers Major Setback as Weaker Trade and Business Investment Weigh on Results

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In an unexpected development, Australian GDP retreated more than anticipated, contracting for the first time in years despite highly accommodative interest rates.  The latest report gives further evidence of the difficulties facing the Australian government and Reserve Bank as they work to keep growth afloat.

Australian GDP Contraction Confirms Policymakers’ Anxiety


Echoing comments from Reserve Bank of Australia Governor Philip Lowe following the latest monetary policy decision, Australian growth has not only decelerated, but fallen into contractionary territory for the first time in over 5 years.  GDP missed forecasts of 0.30% growth by a wide margin, printing at -0.50% for the third quarter.  The main culprit behind the decline was private sector expenditures and a growing trade deficit.  During the quarter, household spending managed to rise modestly while government spending fell alongside business investment.  Net trade was a major drag thanks to import growth which vastly exceeded export growth.  The result was a substantial slowing in annualized GDP growth from 3.30% in the second quarter to 1.80% in the three months ended in September.  After rising on Tuesday, AUDNZD is back on the retreat as the Australian dollar finds itself under renewed pressure.

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Stocks at New Highs as US Factory Activity Expands Faster


In another sign that US growth momentum is accelerating heading into the end of 2016, the latest factory orders data reported by the US Commerce Department notched the 4th straight month of gains.  Aside from outperforming expectations following a 2.70% climb during the month of October, indicating the fastest pace of increase since January of 2015.  The latest data also puts the annualized figure back in positive territory for the first time in nearly two years, highlighting the increasing demand for factory goods as new orders surged.  However, the one item that may derail further growth during the release of November’s data has been the significant upturn in the US dollar over the past month which could hurt export competitiveness.  US stocks continued to climb, with S&P 500 futures climbing to a fresh high on Tuesday.

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European Growth Receives a Surprising Upgrade


In a growing series of positive data developments for the Euro Area, the latest third quarter gross domestic product figures matched or exceeded estimates.  Third quarter growth was confirmed at 0.30% while annualized growth through the three months ended in September was upgraded modestly to 1.70% from 1.60% reported a month earlier.  The growth was predominantly led by better household spending through the monetary union alongside government expenditures whereas private sector expenditures continued to showing fading growth.  Imports also exceeded exports, dragging on economic activity in the region.  Tepid growth may beckon an enlarged asset purchase program in the upcoming ECB decision set for Thursday. However, despite expectations of a program extension, there are concerns that not enough assets will be available for purchase.  After trading flat on Tuesday, EURGBP is back on the climb, trading firmly back above 0.8450.

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Massive Cushing Build Offsets OPEC Optimism


After reaching the highest point since 2015 earlier in the week, WTI crude oil futures are continuing to slide despite the resounding optimism still surrounding the signing of the latest OPEC output-cut deal.  However, while the deal was greeted with hope, the pullback in prices could be a function of rising global output ahead of the January 1st implementation date.  Besides non-OPEC oil production rising in the United States and Russia, Nigeria and Libya also have plans to ramp output higher over the coming months.  Besides potentially negating all the output cuts set to be implemented by the Gulf States, it raises concerns that onshore inventories may continue to fill.  Although the American Petroleum Institute reported a drawdown in overall US stockpiles, Cushing storage rose by an estimated 4.000 million barrels last week, marking the biggest gain since 2008, potentially adding to downward pressure on prices.

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