Australia: No Capex joy here - TDS

Analysts at TDS notes that Australia’s Dec qtr real private capital expenditure (capex) fell by a larger-than-expected –2.1%/qtr (TD flat, mkt +0.5%).

Key Quotes

“The capex component that feeds into GDP—plant & equipment investment—rose by +0.4%/qtr, also underwhelming but at least not a fall. In 2016, real capex spending shrunk by 16%, led a 35% slump in mining, while services investment rose by 3%.”

“The planned (raw) spend for 2016/17 at $A112b was higher than expected, but the sticker shock was the soft first raw estimate for 2017/18 at $A80.6b.”

“The updated capex spending estimate for 2016/17 was $A112.2b (raw, -14% adjusted) which was a marginal upgrade compared with the prior report. The first raw estimate for 2017/18 was $A80.5b (after adjustment, –18%).”

“Ahead of inventories, net exports and public spending updates next week, our Dec qtr GDP is tracking at +0.6%/qtr, leaving annual GDP growth at 1.8%/yr. The RBA’s recent projection was 2%/yr, so could be seen as a small downside miss.”

“Market update and RBA Implications

• Australian bonds were already rallying and the curve flattened after a not-hawkish-enough set of FOMC minutes overnight. 3yrs now –2.5bps to 2.01% and 10yrs –4bp to 2.79%. November OIS is flat at 1.505%. The AUD was already heavy into the report, and was swiftly pushed down to $US0.7665 after the weak Dec qtr and 2017/18 first estimate hit the tapes.
• This week’s RBA Board meeting minutes noted that the economy was coping with shrinking mining investment, and so no doubt the Bank would be disappointed with this weak initial investment estimate for next year.
• Aside from the RBA claiming that any exchange rate appreciation “complicates” the rebalancing of the economy, we do not expect the Bank to lean against the exchange rate while commodity prices and the terms of trade are so strong.”