ASX200 succumbs to prospect of a negative Q3 GDP print ahead of RBA minutes
A remarkably resilient performance from the ASX200 last week as is it finished 1% higher at 7348, despite lockdowns in Victoria and Greater Sydney that from this week includes the key construction industry for the next two weeks.
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Consensus expectations heading into the labour market data were for employment to rise +25k and for the unemployment rate to fall to 5.0%. On both metrics the labour market exceeded expectations as the unemployment rate fell to a 10 year low of 4.9%, on a +29.1k rise in new jobs.
Offsetting some of the good news, hours worked fell by 8.4% in Victoria following its lockdown in June, an effect likely to be replicated next month in NSW, due to the current lockdown in Sydney. A rise in underemployment to from 7.4% in May to 7.9% in June, pushed the underutilisation rate higher from 12.5% to 12.8%.
All in all, a good set of numbers that at any other time would prompt the RBA to think about upgrading its unemployment forecasts. However, this is likely to depend on for how long Sydney remains in lockdown.
Turning now to China Q2 GDP which declined from a base effect distorted 18.3% rise in Q1, to a below consensus 7.9% in Q2. The softer Q2 number partially due to the resurgence in Covid in China that impacted catering, travel and entertainment.
The market is expected to look through the slowdown in Chinese growth, comforted by the PBOC’s recent dovish shift that included an increase in aggregate finance and a 50bp cut to the Reserve Requirement Ratio (RRR).
Since our last update in early July, the ASX200 has continued to consolidate the strong gains from the first half 2021, between 7400 on the topside and 7200 on the downside. This type of sideways price action is not uncommon at this time of the year as viewed in July 2017 and again in 2020.
As such, the view remains unchanged and we retain a preference to buy weakness in the ASX200 towards uptrend support coming 7100/7000 area.
Source Tradingview. The figures stated areas of the 15th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
As new COVID-19 case numbers remaining stubbornly high, lockdowns will likely be extended in Greater Sydney and possibly Victoria. NSW and Victoria account for the lion's share of Australian GDP and employment.
This will likely see Australian Q3 GDP slide into negative territory, even after allowing for some bounce back into the end of Q3, following the re-opening and State and Federal government support for individuals and businesses unable to work.
A significant, although not wholly unexpected, turn of events since the RBA's Board meeting in early July, the minutes of which are released tomorrow at 11.30 am.
To recap, at the RBA’s Board meeting in July, forward guidance remained dovish. Its central scenario is that the conditions for lift-off for rates 'will not be met before 2024'. Reflecting the stronger than expected economic recovery, the RBA elected not to extend its three-year "yield target bond" from the April 2024 bond to the November 2024 bond.
The RBA also announced a more flexible approach to its latest QE program after the current program of $100bn is complete in September, reducing the pace of purchases to $4 billion a week from the current rate of purchases of $5 billion per week, and to reassess this decision in Mid-November.
Looking to tomorrow's Minutes, the market will pay close attention to any debate around the decision to signal a taper in the QE program, as well as any discussion around changing the forward guidance around the cash rate. That said, given the extensive communications from Governor Lowe following July's meeting, the Minutes are unlikely to provide any new information.
Succumbing to the deteriorating domestic COVID-19 situation and following a weak lead from Wall Street on Friday night, the ASX200 has started the week on the backfoot to be trading near 7285.40, -62.7 points (-0.85%).
Should the ASX200 break below range lows 7220/00 area, we retain a preference to buy the ASX200 towards uptrend support coming in 7100/7050 area.
Source Tradingview. The figures stated areas of the 19th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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