Australian Bond Exchange Weekly Newsletter
16 September 2022
Surging inflation in the US economy could lead to further interest rate rises in Australia according to financial experts, as $60 billion was wiped off the ASX on Wednesday on renewed fears of a global recession.
All 11 sharemarket sectors fell, with technology and real estate stocks posting declines of more than 3 percent.
The downturn of the share market comes after the Fed’s announcement to tighten monetary policy to tame inflation, a move that may pressure the Reserve Bank to follow suit through further rate hikes. The benchmark S&P/ASX200 fell 184 points just minutes after the market opened on Wednesday, triggered by spooked US investors worried by larger-than-anticipated inflation data.
The latest US inflation data released on Sept. 13, 2022, shows that consumer prices rose 8.3% in August from a year earlier despite the Fed’s best efforts to decrease the rising cost of living. Other increases were seen in the categories of food and shelter which saw some of the steepest gains.
- Food prices increased by 0.8% in August
- Shelter rose 0.7% in August – the biggest one-month increase since 1990
The points above suggest that the Fed’s rate hikes to tame inflation are yet to be felt, however, the increases were mostly offset by a 10.6% decline in the gasoline index. Gas prices have fallen below $US94 a barrel from the peak price of $US130 a barrel earlier in the year. The decline in gas prices is the result of several factors that include an easing in supply issues.
Bond Market Outlook
The sharemarket tumble can also be seen in the fixed income space. Bond prices have fallen as interest rates have risen around the world – there is an inverse relationship between the value of bonds and their yields, with prices falling as yields rise. This year has seen the biggest losses in the bond market since the 1970s, however there is still income to be earned in the fixed-income space.
For example, real yields are even more attractive when looking at high quality corporate bonds. “You’ve got investment grade yielding more than 5%,” says Invesco’s Waldner. “That’s something on the order of a 2 ½% real yield when 18 months ago investment grade was returning less than inflation.”
Both share and bond investors have experience major losses because of surging inflation, however one factor working in favour of corporate bonds, including high-yield bonds is that debt levels across the economy are healthy.
Often in a recession, the concern is that the economic slowdown will make it harder for bond issuers to keep up with their debt obligations, Christopher Alwine (head of the global credit team at Vanguard).
Australia’s unemployment rate increased to 3.5% in August, up from 3.4% the month before according to ABS’s latest release yesterday. The unemployment rate increase has not been seen in 10 months since October 2021.
Source: Australian Bureau of Statistics
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