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The Asia-Pacific Week Ahead (Jan 4-8): Australian Economy in Stable Recovery

By:

Senior Market Analyst at Interactive Brokers

Market participants in the week ahead are set to receive updates on the state of Australia’s economic recovery, while supportive monetary and fiscal policies help drive investors’ appetites toward riskier assets.

Preliminary data seem to show that the growth of Australia’s services and manufacturing sectors has maintained its positive momentum through the end of the fourth quarter of 2020, amid an easing of COVID-19-related restrictions, as well as following the largest contraction in the country’s GDP since at least the 1930s earlier in the year.

Pollyanna De Lima, economics associate director at IHS Markit, recently said that the Australian economic recovery was not only sustained in December, but “growth also gathered momentum as the loosening of COVID-19 restrictions underpinned further improvements in demand for goods and services.”

IHS market australia PMIs maintain expansion in Q4 2020

This heightened level of demand has generally promoted a quickened pace of expansion in the nation’s private sector output – in fact the quickest pace in five months. The renewed strength also appears to have helped labor market conditions, as De Lima observed that both goods producers and service providers continued to hire extra staff, the former to the greatest extent in close to three years.

However, she pointed out that one area in the country’s economy that “failed to improve was exports, with stricter lockdown measures in some nations, border controls and travel restrictions continuing to restrict external demand for Australian goods and services.” She added that the country’s latest fall in international sales was its eleventh in successive months.

Central Bank & Fiscal Fuel

Meanwhile, the Reserve Bank of Australia (RBA) committed to a more dovish monetary policy stance at its November meeting, including cutting its cash rate target to 0.10% from 0.25%, where it had resided since March, as well as purchasing $100 billion worth of government bonds with maturities ranging from around five to 10 years over the next six months.

The RBA further noted its intentions not to increase the cash rate target until actual inflation is sustainably within its target range of 2–3% – and this amid expectations that both headline and trimmed mean inflation will bottom out below 1% in 2021 and reach 1.5% by the end of 2022.

To date, Australian inflation stands at around 0.7%.

The central bank said its focus over the period ahead will be on its government bond purchase program, and that it is “prepared to do more and undertake additional purchases,” as circumstances warrant.

The bank’s accommodative policy to support Australia’s recovery joins the Australian government’s fiscal stimulus measures to help buoy the country’s labor market, credit flows, and overall economic strength.

To these ends, the Commonwealth government has poured roughly A$270 billion (~13.75% of GDP) worth of funding and revenue measures into helping provide economic relief through fiscal years 2023-2024, while state and local level authorities have committed around A$50 billion to help business and households.

Boost to Risk Appetite

The outsized responses from both the RBA and the Australian government to help keep the country’s economy humming in the face of COVID-19 appears to have helped bolster investors’ appetite for riskier assets, as well as strengthen perceptions about the country’s ability to honor its sovereign debt obligations.

Australia focused ETF outpaces broader index

For example, the iShares MSCI Australia ETF (NYSEARCA: EWA), which has among its top holdings financial sector firms Commonwealth Bank of Australia (OTCMKTS: CMWAY) and Westpac Banking Corp (NYSE: WBK), as well as retail giant Woolworths Group (ASX: WOW), has gained roughly 9.0% year-to-date in 2020 – with positive returns of more than 23% over the past three months.

Over the same three-month period, the EWA ETF has outpaced the broader S&P/ASX 200 index by roughly 2.5%.

Also, over the past three months, credit default swap (CDS) spreads on Australia’s 5-year government bonds have narrowed by around 3 basis points to nearly 15.3 bps.

Investors watching Australia’s economy for further signs of recovery and growth momentum will likely be eyeing the slate of incoming data releases in the week ahead, including IHS Markit’s Services and Composite PMIs, the RBAs Chart Pack, as well as a fresh look at the country’s trade balance.   

On the Calendar:

Tuesday, Jan 5

  • IHS Markit – Australia Services PMI (F-Dec)
  • IHS Markit – Australia Composite PMI (F-Dec)
  • RBA Chart Pack

Wednesday, Jan 6

  • Trade Balance (Nov)
  • Exports / Imports (Nov)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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