Australian bonds gain as Q1 GDP growth disappoints; RBA likely to cut more by end-2019

Australian government bonds gained during early Asian session Wednesday after first quarter gross domestic product (GDP) growth came weaker-than-expected, confirming the dovish stance taken by RBA Governor Phil Lowe.

On Tuesday, the Reserve Bank of Australia (RBA) cut its benchmark interest rate to its historic low by 25 basis points to 1.25 percent, with an aim to assist faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, slipped nearly 1/5 basis point to 1.500 percent, the yield on the long-term 30-year bond also dipped 1 basis point to 2.165 percent and the yield on short-term 2-year traded plunged 2-1/2 basis points to 1.105 percent by 04:00GMT.

Quarterly GDP growth picked up a little in Q1 to 0.4 percent q/q, although annual growth continued to slow and is now down to 1.8 percent, its slowest pace since 2009 in the midst of the global financial crisis. Growth continues to be held down by a weak household sector, although business investment and exports are hardly strong. The public sector is certainly doing its bit to support growth, contributing 1.3ppt to the 1.8 percent growth over the past year, ANZ noted.

Moreover, according to a St.George Bank report, financial markets overnight focussed on remarks from the U.S. Federal Reserve Chairman Jerome Powell. Markets interpreted his remarks as an opening for possible rate cuts in the U.S. later this year. U.S. equities and U.S. bond yields rose in response.

The U.S. dollar sold off, helping the AUD/USD break above 0.7000 briefly. However, U.S. President Trump’s comments overnight reminded investors that trade tensions are still deteriorating.

“We continue to expect another two rate cuts from the RBA this year, taking the cash rate to 0.75 percent before the end of this year. Our preferred timing is August and November, but a rate cut as soon as July cannot be ruled out. The timing will depend significantly on jobs data,” noted St.George Bank.

Meanwhile, the S&P/ASX 200 index fell 0.31 percent to 6,368.5 by 04:00GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 50.51 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex