Australian Bond Exchange

ABEWeekly 08092021

Market Update  


“It always seems impossible until it’s done” Nelson Mandela 


The RBA met yesterday, as it normally does the first Tuesday of every month. It was no surprise that the official cash rate target was kept at 10bps, but it also stated that it would continue to purchase government securities at a rate of $4 billion a week at least until February 2022. 

Prior to the Delta outbreak the Australian economy had considerable momentum. GDP (Gross Domestic Product) increased by 0.7 per cent in the June quarter and by 10 per cent over the year. Business investment was picking up and the labour market had strengthened. The unemployment rate had fallen below 5 per cent and job vacancies were at an elevated level. 

The recovery in the Australian economy has, however, been interrupted by the Delta outbreak and the associated restrictions on activity. GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months. While the outbreak is affecting most parts of the economy, the impact is uneven, with some areas facing exceedingly difficult conditions while others are continuing to grow strongly. 

This setback to the economic expansion is expected to be only temporary. The Delta outbreak is expected to delay, but not derail, the recovery. As vaccination rates increase further and restrictions are eased, the economy should bounce back. There is, however, uncertainty about the timing and pace of this bounce-back and it is likely to be slower than that earlier in the year. Much will depend on the health situation and the easing of restrictions on activity. In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year. 

In its most recent statement, the RBA stated that it is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with current targets. The central scenario for the economy is that conditions for higher interest rates are unlikely to be met before 2024 and that the labour market strengthens enough to support meaningful wages growth. 

The current economic reality, not only domestically but globally, makes it extremely hard to produce new material every week as the news flow is dominated by COVID developments. Whether we like it or not, these developments are dictating the pace of economic policy and the one primary driver – interest rates. As far as bond markets, longer dated yields appear to be well supported as current levels, with some in the market calling a bottom, but it is too early to tell. Central banks will not tempt fate by trying to pre-empt a return to stability preferring to wait for the turnaround before moving. 

The chart below gives one a clever idea of just how dramatic the impact of this latest wave of COVID has had on the various state economies. No surprise that NSW has endured the most of it. The key takeaway is that according to Westpac we will see a dramatic turnaround come mid-2022 across the economy as hopefully life starts to go back to normal. 


We thought it was worth reiterating once again, just how concentrated on average SMSF’s are in risk assets like equities and property – 70% to be exact as per the chart below. The balance is held in cash and exceptionally low interest-bearing accounts like Term Deposits. The reality, however, is that the fixed interest component is almost non-existent with our data suggesting this number is less than 2% whereas in other developed economies this number is closer to 40%. The only reason we can think of is that to date investors in Australia have not been as exposed to these markets but through increasing awareness and necessity we believe this situation will start to turn. 




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