Aussie jumps despite avalanche of grim data from Australia

Summary:

• Australian retail sales disappointed in December, the trade data confirmed a waning domestic demand in the final month of 2018

• RBA held rates unchanged and acknowledged that downside economic risks had increased

• Aussie and Australian stock market trade higher in the aftermath

On hold

Since 2010 the Reserve Bank of Australia has been saying that it wants to see the livelier pace of wage growth and inflation approaching 2.5% before before tightening monetary conditions, however, neither scenario has materialized thus far. Therefore, the central bank held fire in February matching economists’ expectations suggesting no change in nominal rates. On the other hand, the RBA rebuilt its statement in terms of wording quite perceptibly even though the major message was unrevised - another move in interest rates “is more likely to be up, rather than down”. Looking for more particular changes in the bank’s communique it is worth stressing that in the eyes of the RBA downside economic risks have increased. The bank cited the trade tensions affecting global trade and some investment decisions as well as slowing GDP growth in the Chinese economy. At the same time, Australia consumers remain heavily indebted, hence lifting borrowing costs to aggressively would have an adverse effect on an overall level of expenditure. The RBA now sees GDP growth to average around 3%, a slight downgrade after it saw 3.25% in the previous time. As far as the inflation backdrop is concerned the statement confirmed that price growth remained low and stable but it was expected to pick up gradually. By and large, the Aussie jumped immediately after the statement release despite no major changes in the central bank’s rhetoric. Furthermore, the market-based likelihood of an interest rate cut by the year end almost doubled from slightly above 20% yesterday to above 40% this morning. While we may argue if the RBA’s statement was dovish or not, there is no doubt of such dovishness when it comes retail sales and trade data.

Ugly retail sales

Australia retail sales came in well below expectations confirming the domestic demand weakness in the last quarter of 2018. Source: Macrobond, XTB Research

Apart from the RBA meeting there were some important releases from the Australian economy. First of all, retail sales for December fell 0.4% MoM missing the median estimate of no change in monthly terms. For the entire fourth quarter real retail sales totalled merely 0.1% QoQ falling short of the consensus of a 0.5% QoQ increase. The data is a clear sign of the domestic demand weakness despite Christmas. However, in part this miss could be justified by a possible change in consumers’ preferences. Namely, due to Black Friday promotions many consumers decided to shop for Christmas in November which was reflected in a 0.5% MoM jump in sales. Moreover, there is also the likelihood that a part of consumers could have chosen to purchase gift cards, and the sales from them is counted if those cards are realized. Such behaviour was seen for example in Germany. Finally the trade data for December brought a confirmation of a waning domestic demand. On the face of it, the data showed the higher surplus than expected (3681 million AUD vs. 2225 million AUD), albeit the positive surprise was caused almost entirely due to a plunge in imports. Imports dwindled 6% MoM while exports shrank 2% MoM - it signals the domestic demand weakness. Overall despite a positive impact on net exports one may expect that the net effect on GDP growth in the last quarter of 2018 will be negative (the weakness in private consumption is likely to have outweighed the positive effect coming from trade). Although in the retail sales data we may suppose that the weakness could have been caused by changes in consumers’ preferences, no such a conclusion could be drawn from the trade data - an imports plunge came after only a modest 1.3% MoM increase in November. Last but not least, the AIG PMI for services plummeted to 44.3 from 52.1 in January while the CBA services PMI fell to 51 from 52.7. In spite of the fact that we got so many disappointing numbers the Australian dollar is rising 0.4% against the US dollar this morning being by far the strongest G10 currency. The Australian stock market (AUS200) also gained over the session closing almost 2% higher.

The Aussie’s jump could have been caused mainly due to a number of shorts awaiting the dovish RBA’s meeting. As no such a scenario materializes those positions capitulated bringing a bullish wave on the pair. Technically the pair managed to stay above 0.72. The major resistance in the short-term might be found slightly below 0.73. Source: xStation5

In the other news:

• Japan’s services PMI increased to 51.6 from 51 in January

• NASDAQ (US100) closed 1.2% higher; Alphabet’s Q4 earnings brought EPS of $12.77 compared to the consensus of $11.08 and revenue of $31.84 billion compared to the expected $31.33 billion