Australian dollar poleaxed as economy turns Japanese

DXY too off Friday night, EUR sank and CNY was steady:

The Australian dollar was universally poleaxed:

As shorts actually lifted a little to -48k contracts:

Gold held on:

Oil too:

Metals not so much:

Miners are toast:

EM stocks were OK:

Junk ripped:

As Treasuries were bid a touch:

Bunds were flogged:

But Aussie bonds boomed:

And stocks loved it all:

The key data release was US GDP which came in better than expected:

Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the second quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.1 percent. …

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending.

While pretty much everything investment related fell or slowed:

The consumer boomed, with personal consumption expenditures at 4.3% annualised. Love that tight labour market.

Moreover, the Fed’s nowcast model for Q3 sustained the same pace:

In short, the US is weathering the trade war OK.

Which is lot more than can be said for elsewhere. China is building empty apartments to the moon while its industrial economy shrivels and that has bowled Europe clean over via its loony continental scale export-led growth model. Appropriately enough, Germany is leading the way  down. The IFO is in free fall:

Led lower by industry:

With services catching down:

Leading into recession:

With yields tumbling:

As inflation collapses:

All of that with Brexit yet to come. Europe has already turned thoroughly Japanese.

A relatively strong US versus Europe is always bad for the AUD as DXY rises. But there is more going here than that. Aussie bonds out-performed everybody Friday night with the long end of the curve especially strong despite good US data and more stock market reflation. The 10 year spread to the US hit the deepest since 1981:

And the AUD has literally been poleaxed in the last few days, ever since RBA chief Phil Lowe muttered the words:

“It is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the 2-3 per cent target range

It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

In doing so he adopted explicit forward guidance for markets that Australia, too, has turned Japanese, complete with its debt overhang, zombie banks, secular stagnation, government growth dependency and permanent lowflation.

Comments

  1. More like stagflation-lite than growth to me in the US if those relativistic measuring sticks are straightened out. Just what the economics text books tell us to expect from real trading tariffs and large and increasing Federal deficits Last time they tried this it got a bit out of hand if I remember right.

    https://www.alhambrapartners.com/2019/07/26/gdp-profit-revisions-really-highlight-the-vulnerabilities/

    Profits gone nowhere for five years…………where to hide from what is coming is the question

    • It’s like déjà by all over again. Valuations are nuts based on earnings. How long before the BTFD turns into STFD?

  2. Should read Phil Lowe HOPES rates will remain low, i don’t believe it’s something he can fully control
    Think QE will anchor Aussie Gov bond yields but bank lending will blow out.
    Think it’s also in partial a way to save the banks, the spread between deposits and lending rates I believe will widen, maybe not next 6 months but if any mortgage holder believes that they’ll be paying 3.5%?for 30 years they are deluded
    Liquidity is going to get much tighter
    I believe you’ll see gov bond yields at zero negative and home loan rates 5% maybe slightly under or up to 6 or more % which is not even extreme
    Some are saying that Deutsche might spread contagion, if it does or something else, I don’t think they will muck around, close the banks quickly and swiftly work out a restructuring bail in plan and re open with a new capital structure, maybe merge the big 4 into 2, maybe part nationalisation who knows exactly but I think you’ll see the deposit/lending spread much wider in 1 to 2 years with home prices at least 30/50% lower
    Like MB said it’s just going to happen “Because”
    We are headed into very uncertain times

    • Nothing quite like waiting 18 months…

      Trump has to hold this festering, debt-infested crapshoot together for another 16 months. Don’t fancy his chances, but the Dems have perfected the art of self (and national) sabotage and even if the globe turns to isht the Us economy may just hold together long enough to get him over the line. And then, without doubt, his handlers won’t waste a good crisis. Lots of wheels will fall off and the plunder will intensify in rhythm with the jingoistic nationalist appeals to god and country. A case of “I have seen the enemy and they are history”

    • Why on earth would the government and RBA allow that to happen?

      they will buy bank bonds and rmbs

      I would not be surprised if residential mortgages go negative like in Scandinavia

      The AUD will wear the pain not mortgage battlers

  3. That is some really ugly data coming out from Germany. I mean its really buckle down recession time kind of data.
    I have to go to Germany regularly and in general people and households are doing pretty well in the face of that data. German households a quite responsible with their spending and debt.

    Australia on the other hand is the opposite; Macro data seems fine but everyone I know is drowning in debt, cash strapped as they try to figure out where is all their money going. The US is the same story.

  4. I tripled my money (sadly $500 to $1500 only) shorting AUDUSD for a couple of weeks now. Sold off today as FED is widely expected to Cut Teh Rates (TM)

    • Nice one. Fed move priced in already but the guidance that goes with it will be the issue.