Australian Market Strategist
Summary: GDP is forecast to slow to an annual pace of 1.4% today, but if GDP surprises to the downside, we could see a level of growth on par with that of the post-recession read in 1992
GDP is forecast to slow to an annual pace of 1.4% today, but if, as we suspect GDP surprises to the downside, we could see a level of growth on par with that of the post-recession read in 1992.
Net exports will add 0.6% to Q2 GDP, this will offset the punch from weak inventories data earlier this week. Inventories fell by 0.9% over the quarter, but in Q1 rose 0.8%. This reversal will knock around 0.6% off Q2 GDP, as it is the 2nd derivative of inventories data that is applied to GDP.
Government spending which accounts for more than 20% of GDP will also make a positive contribution to Q2 GDP. Government consumption rose by 2.7% over the quarter, offsetting the decline in investment and will contribute 0.5% to the Q2 GDP read.
But even with a large, better than forecast, positive contribution from government spending and net exports, this is not likely to be enough to offset the drag from other partials and weakness in the private sector. The private sector continues to struggle which is key for RBA as consumption accounts for ~60% of GDP. Weak wage growth, high household debt levels and low levels of saving amongst Australian consumers means the propensity to spend the extra cash from the government’s tax cuts could be diminished. July retail sales contracted by 0.1%, suggest the propensity for consumers to spend on discretionary items still remains under pressure, despite tax cuts. An over-leveraged consumer who has whittled away their savings and is now devoid of any material pick up in wage growth is unlikely to increase discretionary spending, particularly given recent consumer sentiment surveys point to rising concerns over the economic outlook. Likely, choosing instead to repair household balance sheets and deleverage.
If the GDP read does come in weaker than the expected 0.5% for the quarter today the RBA will have to rethink their own forecasts again, given that their forecast of 2.5% growth for 2019 will be wildly out of reach.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
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Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
