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"Secret government stimulus” spurs 2nd quarter economic growth

PSK Monthly Newsletter

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9 Sep 2016

Markets –

  • Australian shares fell this week led by declines in bank stocks.
  • US and European markets mostly finished flat, whilst Asian markets were higher with the exception of Japan.
  • In local stock news, TPG Telecom has thrown its hat in the ring to become the 4th telco operator in Singapore in a surprise move. TPG will compete with 2 local operators in lodging their application with the Singaporean authorities in a bid to acquire spectrum.
  • Shares in ASX listed aged care operators slumped following new guidelines by the Federal Government for charging certain services fees from residential aged care customers. Finally a very large loophole closed, which will see most operators margins fall considerably.
  • The ACCC have indicated they are looking at making Telstra open up their mobile networks to competitors in country areas. This is the 3rd time the ACCC have looked at this scenario and the draft decision is expected in February 2017.
  • The Aussie dollar pushed higher this week as the RBA left rates on hold and the market took a big liking to the 2nd quarter economic growth numbers.
  • Oil and gas prices rose after Saudi Arabia and Russia said they had agreed to cooperate to stabilise the oil market. The market reversed some of the gains as the 2 nations refused to provide details.

Economic –

  • The RBA left rates unchanged at 1.5% at their September meeting as expected. No real change in rhetoric in their statement, though some key words were dropped regarding diminished risks in the housing sector.
  • Australian economic growth for the 2nd quarter came in weaker than expected and well below the bumper result in the 1st quarter, which was revised slightly lower. However, the result meant that the annual growth rate is now tracking at a 4 year high of 3.3%. Market liked the number.
  • The components of the economic growth number were a little odd. Mining investment continued to plunge, net trade was weaker, consumption growth halved (the most concerning), but government consumption and investment rose strongly. Some sort of secret stimulus apparently.
  • Australian house prices rose 1.1% in August taking the national annual rate up to 7%. Gains continued to be dominated by Sydney (9.4%) and Melbourne (9.1%). Perth and Darwin continue to see price falls.
  • US employment numbers came in strong with a gain of 151,000, but below market expectations. More importantly, wages growth declined to a 6 month low and unemployment remained steady at 4.9%. US central bank rate hike now probably off the agenda for September.
  • The European Central Bank left policy unchanged, keeping rates very low with no extension announced to their asset buying program. They reiterated that rates will remain at current or lower levels for an extended period of time.
  • A key piece of Chinese manufacturing data rose in July, coming in above market expectations, representing the highest reading since 2014. Fiscal stimulus to the rescue.
  • UK manufacturing data hit a 10 month high after declining to a 41 month low after the Brexit vote. Big falls in the pound are propping up the manufacturing sector, which may still come under stress once they finally trigger Article 50. The pound rose after the data release.

Politics –

  • WA Nationals leader Brendan Grylls has proposed a $5 per tonne iron ore tax, which would net the state government $7.2bn over 4 years. Desperation has set in given the poor state of the WA budget. The ploy was also seen as a way of forcing Canberra to cede a greater share of GST to WA. A tax of that magnitude would put future private sector investment at risk.
  • The anti-immigrant and largely anti-euro Alternative for Germany party is continuing to poll strongly in regional German elections, at the expense of Chancellor Merkel’s CDU party. The Alternative for Germany party will now have seats in 9 of Germany’s 16 state legislatures. Not good for Merkel and her ruling party.
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