For the full picture, download the report: Australian Markets Weekly 15 April 2019

• Australia:  Tuesday’s RBA Board minutes and labour market data on Thursday are the key events this week. Now that RBA Deputy Governor Debelle clarified that the tweak to the policy paragraph of April interest rate decision reflected more the unresolved tension between soft GDP and a still-healthy labour market rather than signalling easier policy, the minutes will likely repeat that the Board did not see a strong case for a near-term rate cut even as members continue to watch the data closely.
• For the labour market, NAB expects a solid 25K increase in employment (mkt: 15K) and unemployment to tick back up to 5.0% (mkt: 5.0%). The NAB Quarterly Business Survey on Thursday contains forward-looking indicators of employment and investment intentions, plus an update on the reported difficulty in finding suitable labour.
• International: For Wednesday’s NZ CPI, our BNZ colleagues look for 0.4% q/q (1.8% y/y), higher than the RBNZ’s forecast of 0.2% q/q (1.6% y/y). Elsewhere, Chinese Q1 GDP and March activity indicators (fixed asset investment, industrial production and retail sales) are due Wednesday. Growth in GDP is expected to slow to 6.3% y/y, while the monthly activity prints are expected to show an improvement in annual growth.

Analysis –  The boom and bust in high-rise apartment construction

• Australia recently experienced one of its largest booms on record in residential investment, driven by new construction as renovations to existing homes inexplicably languished.
• Unlike every past boom, construction has been driven by an unprecedented surge in high-rise apartment construction, where work done on these homes peaked at 1.2% of GDP in 2016. Work done should soon fall, though, as approvals and commencements of high-rise apartments have roughly halved from their recent record highs and are at their lowest level since the early 2010s. There is still a substantial number of apartments yet to be built, but it should be noted that developers are currently completing projects at a record rate.
• The unwinding of this construction boom underpins our forecast that residential investment will fall by nearly 20% by end-2020, almost double the decline anticipated by the Reserve Bank in February.  A rebound in high-rise construction appears unlikely in the near term given: (1) tighter credit conditions for property developers; (2) tighter credit conditions for domestic investors, where rental properties account for most high-rise units; and (3) reduced foreign demand.

Forecast change – AUD/EUR and AUD/GBP forecasts revised higher

• Downward revisions to our GBP/USD and EUR/USD forecasts stem from prolonged Brexit uncertainty and, as articulated in our latest Global FX Strategist, flow through to a quite significant uplift to our AUD/GBP and AUD/EUR forecasts. Our revised forecasts for the two AUD crosses are not too far from current levels through year-end before coming lower in 2020.  We stress that the tail risks on both sides of the new point forecasts are particularly fat given the ongoing high level of Brexit uncertainty.

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