Next From Australia: Q1 Capital Expenditures

There are major data releases coming out of Australia this week. The most important and therefore most likely to move the market is quarterly capital expenditure.

This is an important measure of where private enterprises are both investing and planning to invest. It’s a good indicator of where the economy could be going in the near future.

Schedule and Expectations

There are two important bits of data coming out at the same time tomorrow morning at 03:30 CET (or tonight at 21:30 EST.) Those are Building Approvals and Private new Capital Expenditures.

Given the housing situation in Australia, building data is always on the radar for traders. But, it’s likely to take a back seat this time around.

An average number of surveyed economists project a small decline in new capital expenditures of -0.3% on a quarterly basis. This would be a significant drop from the 2.0% registered in the prior quarter. Last time, the result came in well above expectations, driven by increased investment in buildings and structures.

The Trends

The drop in real estate prices during the final three months of last year could explain this, as they made investing in that sector more attractive. With prices continuing to fall during the last 3 months, we could expect capital expenditure in this item to continue.

Last quarter’s jump in expenditure was the highest since late 2013. Therefore, it wouldn’t be a surprise if it turned out to be a one-off. The component to look at here is the change in equipment spending since that is the one that most contributes to GDP.

Diverging Views

Among analysts, there is a range of projections in new capital expenditure, from -0.7% to +1.0%.

While most of the experts coincide on certain factors, the discrepancy is caused by a difference in weighting. They expect an increase in capital spending in the mining sector, but the rest of the sectors to be somewhat depressed.

The optimistic case is that equipment spending will increase, taking advantage of the expectation that the RBA will cut interest rates. This would lead companies to revise upwards their expenditures.

The pessimistic case is that trade tensions will keep the business conditions prognosis somewhat bleak. This would lead businesses to put efficiency measures on hold.

In their first-quarter earnings reports, Australian corporations largely reiterated their CapEx guidance for the year. Typically it isn’t until the second quarter that companies adjust their annual spending plans.

Other Data and Market Reaction

We’d expect to get the biggest market reaction outside of the aforementioned range.

A result below -0.7% would be quite negative for the AUD (and, by extension, the NZD.) There would also be talk of pricing in further rate cuts.

A result above 1.0% would be beyond even the most optimistic projection and could lead to significant strengthening in the currency.

At the same time, we have Building Approvals data, which we expect to improve to just -3.6% from the -15.5% registered the prior month. RBA Assistant Governor Ellis will also be beginning a speech at that time, though there aren’t any expectations of providing any change in the central bank’s outlook.