Australian Bond Exchange Weekly Newsletter 1 July 2022
“Focus on what you can act, the rest is negative noise.”
- Marcus Aurelius
Key Points
- May Australian retail sales still strong
- Very solid credit growth
- Term Deposits – make sure you do your credit risk assessment despite the government guarantee
- Waiting for the next increase in US interest rates
- Further easing of lockdown restrictions in China
Australia
Retail sales for May came in above expectations and went up 0.9% vs market forecasts of 0.3%. The annual growth was a very strong 10.4% which again highlights the urgency for the RBA to continue normalising cash rates to slow down the economy. The weakening consumer confidence is an early indicator that we probably have seen the best. Consumption should normalise over the next couple of months as most of the COVID catch-up spending is behind us.
Recently published credit growth numbers for May were showing a strong picture, growing by 0.8% with an annualised growth of 9%. That number is at a 13-year high and the fastest annual pace since October 2008. Households and businesses have borrowed more providing strong growth for the Australian Economy. Both numbers are clearly before the interest rate hike of the RBA and the market is regarding these figures as representing the peak of the cycle.
In some corporate news, insurance and banking major, Suncorp-Metway had it’s credit rating downgraded by S&P from AA- to A+. This was on the back of the recent announcement that Suncorp is conducting a strategic review of its banking operation which might be sold off or spun out.
In some other surprising news, recently neo bank Volt is handing back it’s banking licence and will return more than $100 million in deposits to customers. This is a strong reminder that investors must do their credit assessments carefully, in particular with the scenario of a slowing economy which may lead to higher bad and doubtful debts and a tightening of the funding channels. Ask yourself: Would you lend your money to the bank (most likely in form of Term Deposits) if the government guarantee would not be there and why is the rate the institution is offering in the TD market so much higher than the benchmark?
Please talk with us if you have any questions regarding Term Deposits as we offer government guaranteed options!
Global
Globally everyone is waiting to see if the US Federal Reserve is doubling up with another 75bps rise. Fed Chair Jerome Powell and his European counterparts were debating on how to tackle persistent price pressures and slower growth with the ECB still debating when they will do their first move. Current market expectations are that the US Fed rate will hit 3.5% by the end of the year and we have seen some rallies at the long end of the government yield curve.
In some more hopeful news, China has halved its quarantine time for travellers. This announcement signals a major shift and one can only hope for some better news for the long-suffering citizens of China.
We currently have one of the most diversified bond portfolios you can find in Australia and last week we added to that list with a new issue in Rolls Royce. Full documentation is available here
Contact us if you have any questions or would like any assistance.
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