Australian Bond Exchange

ABE Weekly 31/05/2021

Market Update  


“I am the master of my fate: I am the captain of my soul.” Invictus, William E, Henley 


Conditions is Australia are largely unchanged since our last weekly however, the Australian National Accounts to be released on Wednesday this week, will provide an estimate of economic activity for the March quarter. The RBA meets today Jun 1 where we expect the official cash rate will kept on hold at 10bps. There is no change to the Governors stance on monetary policy maintaining a stimulatory stance. It’s no surprise that Covid restrictions have caused some slowing in economic activity together with the floods in NSW and QLD. Labor market conditions remain on the improve as does consumer spending and company profits. 

Looking ahead, the economic recovery will continue through 2021 at above trend pace, with strength centred on the consumer and housing, as well as public demand, and business spending on equipment. We suspect the next 6 months will see a little more volatility where the economic outlook is concerned.  

Bottom line, it appears people generally are feeling a lot more positive about their future. For example, spending on goods at the end of 2020 was a stunning 6.2% above pre-covid levels, a year earlier. Spending on services was down by 7.8% – highlighting substantial scope for a catch-up in 2021. The relaxation of social distancing guidelines contributed to what we expect to be a strong lift in services spending in Q1. By contrast, retail slipped, down 0.5%, impacted by disruptions (snap lockdowns and floods). 

Good news for everyone long property, housing is on fire, responding to record low-interest rates and the generous Home Builder program, as well as the boost from folk staying local, deciding now is a good time to renovate. Activity surged by around 6% in Q1, including new dwellings +4% and renovations +11% (although that latter figure may be tempered in the accounts).    

The chart below illustrates economic growth across all the states. It’s fair to say the numbers are impressive as compared to last year, and for all intents and purposes, these growth rates are set to continue moving forwards so long as official cash rates stay where they are. The chart below that illustrates where, on average, the growth is coming from. 

In keeping with our theme of discussing financial concepts. This week we look at the Random Walk Hypothesis. This hypothesis usually referring to stock’s can also be applied to most actively traded securities. In short, it states that securities follow a random walk and can therefore not be predicted. For anyone interested in reading a little more about the theory the go to book is called “A Randon Walk Down Wall Street” by Burton Malkiel. The theory was based on a model whereby the price of a security was based on a coin toss. If heads the security went up. If tails it went down. Charting the outcome of these coin tosses, it was made evident that the direction of a security was just as random as a coin toss. This put in question the theory that past behaviours are a good predictor of future behaviours. Whilst this is more the case with shares it is fair to say that with bonds past behaviour is a better predictor of future behaviour. 

There are many theories and models seek predict the price of securities in the future. If only we should be so lucky! Next week we’ll look at technical analysis, yet another model of trying to predict the future behaviour of bonds, currencies and stocks. 

Signing off, The Australian Bond Exchange 

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