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AUD: Continuing to Drift Australia's economy narrowly missed a recession: real GDP grew by just 0.1% quarter-on-quarter and 1.1% year-on-year in Q1. The data undershot the consensus forecast by around 10bp, mainly due to an upward revision to Q4 data. Stock rebuilding was the most significant contributor to growth, followed by government and household consumption. However, investment contracted, and net exports dragged down growth sharply. Dependence on inventory expansion shows a weak foundation of growth, thus equally threatening the soft Q2 GDP growth.
Australia GDP
On the bright side, however, electricity rebates and tax cuts by the government, along with a rise in the minimum wage, should help bring some much-needed momentum back into the economy within the next few months. The RBA targeted 1.2% YoY growth in H1 2024 and remains sanguine on the current GDP prints. But remember that this can as well be an inflationary event, we will have to see how the RBA will manage this money printing as Australia is nearly on a recession.
Misleading RBA Signals Productivity grew in the first quarter over the last year but is still very weak. Actual unit labour costs decreased in their growth rate but were still a robust 10.6% YoY, down from 11.8% in Q4. The labour market continues to exert upward pressure on inflation. RBA Governor Michele Bullock acknowledged the poor growth in testimony in front of a parliamentary committee. Still, he reiterated that the central bank stands ready to lift rates if inflation remains too high. Despite these mixed messages from the RBA, Deputy Governor Andrew Hauser will tell the public on Thursday that he believes in retaining post-pandemic employment gains while cooling inflation—a sign he is wary of tightening too fast.
AUD/USD looks very flat, assigning roughly a 30% chance of a rate hike in August-September and a potential cut by December. Due to investor indecision, they still seem to be waiting for clarity from the data and the RBA. AUD/USD is just stuck in a tight range but is even influenced by lower U.S. Treasury yields on global growth concerns. That was probably best illustrated by the stronger-than-expected China Caixin Services PMI, which boosted the AUD for a second or two by showing how vital outside events are for the currency.
USD: When Bad News Turns Good Market dynamics shifted yesterday, with higher risk aversion bringing back safe haven buying of JPY and CHF and, to a lesser degree, USD. While equities and oil prices were lower, questions over resilience in global demand have been significantly reinforced by the downbeat ISM manufacturing survey. More to boot, job openings in the United States plunged to a three-year low. Today's focus is on the ADP private jobs report and ISM surveys for May. ADP has been a very poor proxy over the years for NFP stakes, and ahead of ISM, especially after last month's contraction and amidst persistent price pressures, the stakes are higher. Failure to show headway will likely stoke increased stagflation fears for the US economy. Still, the USD might rally if robust U.S. macro data gives global risk appetite a cold shower.
JPY: Happier Days. for Now JPY continues to enjoy a rally powered by three factors: lower U.S. Treasury yields, fears that the "Goldilocks" era of investment may be ending, potentially boosting yields, and potential BoJ policy tweaks. While fretting about persistently high inflation, investors must reconcile this with softer recent U.S. data that could possibly lead to stagflation, which would naturally be suitable for funders like JPY. Deputy Governor Ryozo Himino highlighted the monitoring of the currency impacts on the broad economy, flagging a weak JPY hitting imports and imported inflation. Labor market earnings data suggest Japan may be emerging from deflation, with the fastest base pay growth in 23 years, adding to the case for BoJ policy easing.
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