ABEWeekly 24-11-2021

24th November 2021 

Market Update  

 

We’re here to put a dent in the universe. Otherwise, why else even be here?” – Steve Jobs 

 

The RBNZ demonstrated today that interest rates can in fact go up. The RBNZ increased its cash rate by 25bps to 75bps on the back inflationary concerns relating to a potentially overheating economy. Whilst the situation in NZ is largely different to that in Australia, it does bring to light the likelihood that interest rates may edge higher in the medium term. 

In terms of this theme one can see (chart below) that the increasing steepness of yield curves generally around the world, particularly Australia and the US which reflects a very positive economic growth outlook.

It has been another week focused on inflation, wages, and monetary policy in Australia and abroad. Tuesday saw the release of the RBA’s November meeting minutes and a speech by Governor Lowe on inflation. Governor Lowe continues to focus on global and local inflation dynamics. A key explanation for the recent strength in inflation globally is the disparity between goods supply and demand. With production limited by the pandemic together with lifestyle changes the demand for goods has skyrocketed.  

The prime issue for inflation going forward will therefore be how the labour market, particularly wages growth, responds to recent inflation pressures. The RBA is less than upbeat on the outlook for wages in Australia. It believes that the strong wages growth seen in the US and UK has been supported by a mismatch of labour supply and demand. Countries like Australia and Japan, in contrast, had not built up an imbalance thanks to the success of programs like JobKeeper which kept employees attached to their employers during lockdown.  

All told, the speech emphasised the focus of the Board on achieving its medium-term policy objectives and, while aware of the risks, their belief that they need to be patient to do so. The Q3 wage price index out this week supports this view, with wages rising 0.6% in the three months to September and 2.2%yr – growth in keeping with conditions prior to the pandemic, but weak versus the history of the survey. 

Moving further afield, following last week’s extremely strong US CPI for October, inflation updates for the UK and Euro area this week confirmed that price pressures related to supply chains and energy are global phenomena, with annual inflation at 4.2%yr and 4.1%yr respectively. For both jurisdictions, these are highly unusual outcomes, more than double their central bank’s targets. 

In terms of data out of China, October retail sales surprised to the upside this week, suggesting that authorities have significantly improved their ability to control sporadic outbreaks of delta without a material consequence for consumption suggesting China is again also finding its feet again post the Evergrande situation. 

As the search for yield continues, the use of alternative fixed income securities or Yield Enhanced Securities (YES) is on the rise. In contrast to other developed countries the use of “Tailored Investments” in Australia is limited to a very select group of investors.  

The Australian Bond Exchange recently issued a Bond Linked Security over the car manufacturer Jag Land Rover yielding 4.5% with a term of 5 years that was very well received by the market. We are currently in the process of issuing a similar security over Xerox, another well-known household name. Please contact your advisor if you have interest in this security. 

Till next week…the team at The Australian Bond Exchange