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SYDNEY: Australian retailers began the second quarter of the year on a gloomy note as sales fell in April in a sign of rising strain on the broader economy just hours before the country’s central bank is seen likely to cut interest rates to record lows.
Tuesday’s data from the Australian Bureau of Statistics (ABS) showed retail sales fell 0.1% in April from March, the first negative reading this year and confounding forecasts for a 0.2% gain.
The decline, led by household goods, eating out and clothing, briefly sent the local dollar to the day’s low of $0.6959. The currency was last flat at $0.6973.
Household consumption has been a major source of worry for the Reserve Bank of Australia (RBA) as miserly wage growth and falling home prices eat into spending power in a sector that accounts for 56% of the economy.
The soggy data will support widespread expectations for at least two cuts this year to 1.00%. Financial markets are pricing in a 50-50 chance of a third move to 0.75% by Christmas.
A cut on Tuesday – the decision is due at 0430 GMT – will be the first since August 2016.
Economists say better days might be ahead, helped by expectations of lower mortgage rates and a boost to household incomes from promised income tax cuts.
A 3% increase in the national minimum wage from July 1 will likely support those on lower incomes, aiding consumption.
Yet, industry-wide wage growth is rising at a snail-paced 2.3% and “if that doesn’t improve then any pick-up in retail spending will be short-lived,” said Callam Pickering, APAC economist for global job site Indeed.
TWO SPEED ECONOMY
In contrast to the gloomy household sector, businesses are holding up better.
Other data released on Tuesday showed exports added 0.2 percentage points to first-quarter gross domestic product (GDP) led by booming demand for Australia’s resources, notably iron ore.
The trade surplus ballooned to $13.6 billion in the March quarter, easily the highest on record, offsetting much of the country’s perennial deficit in income, which includes dividend and debt payments, investment flows and the like.
As a result, Australia’s current account deficit shrank to just A$2.9 billion, better than an upwardly revised A$6.3 billion deficit in the previous quarter and the smallest since mid-1997.
That follows data on Monday showing a decent increase in first-quarter company profits together with higher wages, prompting some economists to upgrade their GDP forecasts.
Data, due 0130 GMT on Wednesday, is now likely to show Australia’s economy grew 0.5% for the first quarter, from earlier expectations of 0.4%. Annual growth is still seen slowing to a decade-low of 1.8%.
“In light of the data… we are nudging up our estimate for Q1 GDP from 0.4% q/q to 0.5% q/q,” said Ben Udy, Singapore-based economist for Capital Economics.
“The big unknown is still consumption spending.” – Reuters
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SYDNEY: Australia’s prudential regulator said on Tuesday it plans to relax some of the norms banks use to determine how much they can lend to customers, sending stocks in the sector higher on expectations the move would boost borrowing.
The change would remove the minimum 7% interest rate banks are currently required to use in their stress tests of customers’ loan applications and instead propose a 2.5% buffer above the bank’s loan rate to assess serviceability.
The proposed easing of the borrowing limit, first introduced in 2014, comes amid a sustained drop in house prices, record-low credit growth and came hours before the central bank signalled it might cut interest rates from 1.5% as soon as next month.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases, possibly unnecessarily so,” Australian Prudential Regulation Authority (APRA) Chair Wayne Byres said in a statement.
The proposal also marks a slight softening of APRA’s more strident position on mortgage regulation that followed a scathing year-long public inquiry into banking sector misconduct .
That inquiry put forward dozens of recommendations including a strict interpretation of current lending rules and tests before signing on home borrowers.
After the inquiry, Australia’s banking sector has faced significant market headwinds, not only from the regulatory environment but also a broader slowdown in the economy.
“Conditions must be far worse than what is apparent in the public data,” Deutsche Bank banking analyst Matthew Wilson said in a note, which called the proposal “an about-turn from APRA’s previous stance”.
Bank shares surged, pushing the broader market higher and adding to the previous day’s rally when a surprise conservative election win removed concerns about drastic regulatory changes.
Shares of the country’s biggest lender, Commonwealth Bank of Australia, jumped 3% before easing to close 2% higher. Shares of No. 2 lender Westpac Banking Corp were up 2.7%, while the third largest, Australia and New Zealand Banking Group, jumped as much as 5% at the open before closing up 2%. The benchmark index was 0.37% higher.
The announcement signals “that the housing regulatory environment has passed its maximum point of tightening,” Goldman Sachs analysts wrote in a note.
CUT ON THE CARDS
The relaxed lending standards, coupled with a likely Reserve Bank of Australia (RBA) rate cut, is expected to provide support to the country’s A$1.9 trillion ($1.31 trillion) housing market, which has slowed significantly.
RBA Governor Philip Lowe said on Tuesday the central bank would consider cutting interest rates at its next policy meeting in June, its clearest signal of a cut yet.
He added prudential tweaks would complement any easing in monetary policy.
“If APRA does remove the floor, some will borrow more and some will take advantage of that and that will help, but that is not a substitute for lower interest rates,” Lowe said in Brisbane.
Australia’s average mortgage rate for new loans is about 4%. But the current serviceability floor means banks only approve new loans if borrowers can repay “comfortably above” the regulator’s 7% minimum. Banks have typically interpreted this to be 7.25%.
Relaxing that rule to only a 2.5% buffer above the average loan rate would mean mortgagees would be assessed on their ability to repay loans at a 6.5% rate, 75 basis points below the current minimum floor.
According to UBS, the drop would let home buyers borrow up to 8% more.
“We’re giving power back to the banks to use whatever rate they see fit,” said Nathan Bell, a portfolio at fund manager InvestSMART. – REUTERS
TOKYO: Growing fears about the impact of a worsening U.S.-Sino trade conflict on global growth lifted the safe-haven Japanese yen to a six-week high against the dollar on Wednesday.
Elsewhere in the markets, the New Zealand dollar hit its weakest in half a year after the country’s central bank cut interest rates to record lows and projected a chance of even lower rates in the future.
But the broader market’s focus is on for trade talks on Thursday and Friday in Washington, where Chinese Vice Premier Liu will try to salvage a deal that would avoid a sharp increase in tariffs on Chinese goods ordered by U.S. President Donald Trump.
The prospects of an escalation rather than a resolution of the U.S.-China tariff war has seen the yen draw steady support from a flight-to-safety bid in recent days.
Otherwise, moves in currency markets have been relatively orderly compared with those in equity markets.
On Wednesday, the dollar index against a basket of six key rivals was last down 0.2 percent at 97.463, wiping out the previous session’s gain of a tenth of a percent.
Against the yen, the dollar slipped 0.3 percent to 109.92 yen for its fourth-day of losses against the Japanese currency and briefly touched a six-week low of 109.905 yen.
Hopes for an imminent trade deal sank on Sunday, when U.S. President Donald Trump said he would raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent by the end of the week and would “soon” target the remaining Chinese imports with tariffs.
Some investors suspected Trump’s threat was a negotiating tactic.
Shusuke Yamada, currency and equity strategist at Bank of America Merrill Lynch, said traders had been long dollar/yen until last week to profit from the trade’s decent carry in the low volatility environment.
“This year, after the January 3 (flash) crash, the equity market has been strong (and) volatility has been low, and that’s why the dollar/yen has been supported,” said Yamada.
“The question is whether that will come back, or we’re heading into a different environment, which is (one of) vulnerable equity and higher volatility,” he said.
Since last Friday, the dollar has lost about 1.6 percent against the yen, which tends to benefit during geopolitical or financial stress as Japan is the world’s biggest creditor nation.
Kumiko Ishikawa, senior analyst at Sony Financial Holdings, said traders’ focus is now on whether the yen will strengthen past 109.70 yen per dollar, a recent high that was last hit in late March.
“A lot of focus is on whether dollar/yen will break through this level. If it breaks through it, I think there are a lot of traders who’re looking to jump in to sell,” said Ishikawa.
She added she believed the yen would break through that level if Trump followed through on his threat to increase tariffs on $200 billion worth of Chinese products this week, and vented impatience over negotiations with China.
Against other major currencies, the dollar kept largely to well-trodden ranges.
The kiwi dollar was the major exception in Asia after the Reserve Bank of New Zealand (RBNZ) cut benchmark cash rates to 1.5 percent from 1.75 percent.
The New Zealand dollar was last off 0.4 percent, recovering somewhat after falling to $0.6525, its lowest since last November.
The RBNZ’s governor said on Wednesday that uncertainties to its interest rate projections were “large”, and added that the U.S.-China trade war and growing trade barriers were one of the bank’s major concerns for New Zealand’s economy.
The Australian dollar rose 0.1 percent to $0.7019.
The euro was also up a tenth of a percent, at $1.1203 .
The European Commission said on Tuesday that euro zone would rebound next year from a slow-down in 2019 and unemployment would fall further, but inflation was likely to stay at this year’s levels and below the European Central Bank’s target.
The pound, meanwhile, extended losses to a third day after edging down a tad to $1.3070. – Reuters