ASX 200 plummets as Wall Street losses and weak AU GDP hint at RBA rate cuts

The ASX 200 trades 151 points (-1.87%) lower at 7951 at 1.00pm AEST.

Wall Street declines overshadow soft GDP growth

Despite another quarter of sluggish economic growth suggesting that Reserve Bank of Australia (RBA) interest rate cuts might be on the horizon, the local market could not escape the downdraft from heavy falls on Wall Street overnight.

Australia's gross domestic product (GDP) increased by 0.2% in the June quarter for an annual growth rate of 1.0%. This marks the eleventh consecutive quarter of growth, but Katherine Keenan, Australian Bureau of Statistics (ABS) Head of Accounts, noted: “Excluding the COVID-19 pandemic period, annual financial year economic growth was the lowest since 1991-1992 - the year that included the gradual recovery from the 1991 recession."

Analysing the details

• Per capita GDP growth: fell by 0.4% quarter on quarter (QoQ), marking he sixth consecutive quarterly fall in per capita GDP as the "per capita recession" deepened
• Household saving-to-income ratio: unchanged at 0.6% as a 0.9% rise in gross disposable income outpaced a rise in nominal household spending of 0.7%
• Household spending: fell 0.2% in the quarter, detracting 0.1 percentage points from growth. Keenan commented, “The strongest detractor from growth was transport services, particularly reduced air travel. This was the first fall for this series since the September 2021 quarter”
• Inventories: detracted 0.3 percentage points from growth in the June quarter following a build in March
• Government spending: rose by 1.4%. Keenan added, “National non-defence spending drove growth this quarter and grew for the seventh consecutive quarter. The rise in June was due to continued strength in social benefits programs for health services. State and local expenditure also contributed to growth with a rise in employee expenses.”

RBA's restrictive monetary policy weighs on GDP growth

Today's soft GDP print is in line with the RBA's revised forecasts from the August statement of monetary policy. The current pace of tepid economic growth is the unpleasant side effect of restrictive monetary policy, as the RBA looks to rebalance demand and supply to cool stubborn inflation.

The RBA’s updated forecasts expect GDP to rebound to 1.7% year-on-year (YoY) in the December quarter of this year. However, given the current growth trajectory and against a backdrop of stubborn inflation and subdued consumer spending, it’s not entirely clear where the rebound in growth will come from, barring pre-emptive RBA rate cuts.

Historical Australian GDP growth

• Q1 2023: 2.4%
• Q2 2023: 2.1%
• Q3 2023: 2.1%
• Q4 2023: 1.5%
• Q1 2024: 1.1%
• Q2 2024: 1.0%

RBA board meeting outlook

Today's GDP data is not expected to influence the RBA’s decision at the 24 September board meeting, where rates are likely to be held at 4.35% with continued hawkish guidance.

Nevertheless, the interest rate market still expects the RBA’s next move to be a rate cut, with 23 basis points (bps) of rate cuts priced by year-end and a cumulative 56 bps of cuts by April 2025.

RBA growth and inflation forecasts chart

ASX 200 technical analysis

After today’s bruising sell-off, we are open to the idea that the ASX 200 has put in place its high for the month of 8116 in the first week of trading, just like it did in August at 8148.

We are also open to the idea that the ASX 200 has carved out a double top of sorts at 8148 and 8116.

In this case, the question becomes how deep the pullback in the ASX 200 develops. Initial support level is viewed at 7850. However, the more likely downside objectives would be the 7675 area, which picks up the 200-day moving average and trend channel support.

ASX 200 daily chart

• _{Source: TradingView. The figures stated are as of 4 September 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}