Record Low Australian Rates Extended

Daily Analysis - 07/02/2017

Reserve Bank of Australia Presents More Upbeat Assessment


In spite of a third quarter GDP contraction, the Reserve Bank of Australia sounded an upbeat tone on the outlook for the country, anticipating 3.00% growth for the years ahead and a gradual revival of inflation measures along with resurgent commodity exports thanks to a more competitive currency.

RBA Keeps Main Rate on Hold

In a widely anticipated move, the Reserve Bank of Australia determined that it was appropriate to leave the benchmark interest rate on hold at a record low 1.50%.  According to RBA Governor Philip Lowe, inflations remains low, and is likely to stay at depressed levels for an extended period of time despite headline inflation projected to rise back above 2.00% during the 2017 calendar year.

A significant portion of the drag on the economy is the lingering overhang of the mining boom, however, the weaker Australian dollar is helping to buoy the economy and keep it competitive.  Furthermore, investment in other areas of the economy is projected to spur 3.00% growth over the next few years as commodity exports rebound and banks are able to maintain the current pace of lending.  In the aftermath of the decision, the Australian dollar fell versus the New Zealand dollar, extending a recent rout.


Draghi Promises Support

In remarks delivered on Monday to the Economic and Monetary Affairs Committee of the European Parliament, European Central Bank President Mario Draghi reiterated the institutions commitment to reaching the 2.00% inflation target.  Although inflation is approaching the desired level, as Draghi highlighted, it is mostly upward pressure from rebounding energy prices.  Other measures of inflation which strip away the more volatile month to month components are still only displaying weak progress.

As a result, he pledged to continue supporting accommodative measures while promising additional action if the outlook for consumer prices deteriorates.  Furthermore, he mentioned the Central Bank’s capacity to expand its asset purchases activities or extend the duration depending on how conditions evolve over the coming months.  The reaction in the Euro to his remarks was significant, plunging the currency to a one-week low against the US dollar.


Gas Rebounds After Reaching Multi-Month Lows

A combination of forecasts for milder weather conditions over the coming weeks combined with inventories which remain elevated relative to their five-year averages drove prices to the lowest point in weeks.  According to the Energy Information Administration, stockpiles fell by 87 billion cubic feet for the week ending January 27th, matching expectations.

Despite the fact that Baker Hughes did not report any new gas rigs coming online last week, warmer weather has seen consumer heating demand needs decline dramatically, sending gas prices to the lowest point since late in November.  Furthermore, proposed taxation plans could see a sharp uptick in production over the coming months, setting the stage for a deeper decline unless a cold weather front returns.  After opening lower on Monday, prices found support just above $3.000 per MMBtu, extending gains in early Tuesday trade.


German Industrial Production Slides

Although factory orders managed to roar back to life in December according to figures released on Monday, German industrial production suffered a major decline during the same period per data announced by the Federal Statistical Office earlier.  Industrial production fell by -3.00% month over month through the end of December compared to 0.40% growth during November.

Besides marking the fastest pace of contraction since 2009, the figure highlighted worsening construction and manufacturing activity in the country.  All components of the figure declined during the period, with the capital goods experiencing the steepest drop of -5.40%.  In another surprising development, new polls show that the Social Democrats have managed to show a minor lead over other political parties, potentially setting up Martin Shulz for the Chancellorship.  After a steep drop on Monday, the DAX 30 is trending marginally higher on the session.


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