G’day, forex mates! As Pip Diddy highlighted in his latest Top Forex Market Movers of the Week, the Aussie was getting creamed because of a nasty bout of risk aversion and slumping iron ore prices. But what about Australia’s underlying fundamentals? Let’s take a look, shall we?
Australia’s economy grew by 0.9% for Q3 2015 while the estimate for Q2 was revised upward from +0.2% to +0.3%. According to the GDP report from the Australian Bureau of Statistics (ABS), the main driver for the higher quarter-on-quarter growth was the 4.6% increase in exports (-3.3% previous) and the 2.4% decrease in imports (-0.7% previous), with net exports having a positive contribution of 1.5% to GDP. The growth in exports, in turn, was linked primarily to the surprising 5.2% increase in mining production (-3.0% previous).
The main drag, meanwhile, was the 4.0% drop in investments, with private investments down by 2.9% and public investment down by 9.2%. As for the annualized GDP reading, it bounced back to 2.5% after dipping to a two-year low of 1.9%.
For the November period, Australia’s jobless rate ticked lower to 5.8% from 5.9% instead of ticking higher to 6.0% while employment change saw a net increase of 71.4K jobs instead of a 10.0K net decrease, although the previous reading was revised downward from 58.6K to 56.1K.
The better-than-expected readings were a surprise for most forex traders, but those who took the time to read my Forex Trading Guide for the event were probably well-prepared. After all, I did point out that leading indicators were pointing to an upside surprise.
Anyhow, the downtick in jobless rate seems to be healthy since the number of unemployed people shrank by 2.8K to 739.1K but the labor force participation rate actually climbed to 65.3% from 65.0%. Also, the net increase in jobs was mostly due to a 416K increase in full-time employment.
Overall, a very solid jobs report, but many forex traders and market analysts are openly saying that it’s too good to be true.
Business Sentiment & Conditions
The National Australia Bank’s (NAB) business confidence index for the November period improved from +3 points to +5 points. Business conditions also remained unchanged at a robust +10 points, but the details of the report show that the mining and manufacturing sector are still in negative territory, but they were offset by positive business conditions in the six other industry groups, especially services. The report also noted that there was “a stronger expansion of non-mining business investment” since the capital expenditure index was at +6, which is above the long-run average of +5 points.
Moving on, NAB and the Australian Industry Group (AIG) seem to be at odds with regard to business conditions since AIG is saying that the manufacturing sector was improving given that AIG’s performance of manufacturing index (PMI) for the November period increased from 50.2 to 52.5, with 5 of the 8 manufacturing sectors reporting improving business conditions.
In contrast, AIG’s performance of services index (PSI) indicated that the services industry’s mild contraction worsened a bit since the reading stumbled from 48.9 to 48.2 due to deteriorating conditions across all activity sub-indices. The new orders sub-component, in particular, was down 1.6 points to 47.3, which is a bit worrying since this is the second consecutive month of weakening demand. Also, 5 of the 9 services sub-sectors were in negative territory, with the retail sales sub-sector being the most worrying (45.2 current 49.9 previous) since it could mean lower consumer spending down the road.
Consumer Spending & Sentiment
Australia’s seasonally-adjusted retail trade turnover increased by 0.5% month-on-month (+0.4% previous) and 3.9% year-on-year (+3.7% previous) for the October period. This was mostly due to a surprising 3.5% surge in department store sales (-1.6% previous), but this was offset by lower retail sales in cafes and restaurants (-0.6% current vs. 0.7% previous) and clothing and footwear stores (-0.1% current vs. 0.3% previous).
Moving right along, the Westpac-Melbourne Institute’s consumer confidence index for December declined by 0.8% (+3.9% previous), but ordinary blokes and sheilas are still optimistic since the reading is just barely above the 100.0 neutral mark at 100.8. The dampened optimism was apparently mostly due to concerns over an expected hike in the goods and services tax (GST). Also, 26.2% of respondents were more inclined to park their cash in banks (27.0% previous) while only 23.4% of respondents are now open to investing in real estate (28.2% previous).
The headline reading for Australia’s CPI was up by 0.5% for Q3 2015, which is lower than the 0.7% printed back in Q2. This was mostly due to the 1.7% decline in automotive fuel prices after a 12.2% increase back in Q2.
On an annualized basis, CPI was up by 1.5% for Q3 2015, which is the same as in Q2 2015. The main drags were the transport (-2.2% vs. -2.4% previous), communication (-4.1% vs. -3.4% previous), and clothing & footwear components (-1.0% vs. -0.9% previous). Interestingly enough, the transport component decreased at a slower rate in Q3 due to slower rate of increase in the automotive fuel sub-component (-9.8% vs. -10.6% previous). On the other hand, the “food and non-alcoholic beverages” component saw a sudden drop from +1.3% to only +0.2%.
Summary & Conclusion
Overall Australia seems to be doing okay. It’s economy is growing right in the middle of the RBA’s 2-3% range, and its inflation problem isn’t as severe when compared with New Zealand and other developed economies, so the RBA’s decision to keep rates on hold and somewhat upbeat outlook seems justified.
Also, there are some signs that the Australian economy is shifting away from being dependent on mining and commodity exports, but investment in non-mining industries remain rather lackluster, which is probably why forex traders were dumping the Aussie very hard due to last week’s slump in iron ore prices.