Australian Bond Exchange Weekly Update
Friday 3rd November
Key Points
- War of words – all eyes on the RBA as IMF tips a rate rise
- Long way to go – Federal Reserve holds but cautions further hikes ahead
- Eurozone inflation shrinks – along with the economy
- Private credit growth in Australia flatlines but retail sales climb
- Bank of England holds rates again
- Asian manufacturing activity softens.
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate remains unchanged at 4.1%pa and the annual inflation rate in the year to September is 5.4%.
- The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate in the year to September is 3.7%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 6.7% in the year to September.
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.9% in the year to September.
War of words- All Eyes on the RBA as IMF Tips a Rate Rise
Following last week’s hotter than expected September quarter inflation figures, there has been a strengthening chorus of voices who believe the RBA will need to continue its rate hiking cycle from next week.
In a survey conducted by the Australian Financial Review, 33 out of 35 economists believe the RBA will hike, with nine economists predicting that 4.6%pa will be the terminal rate.
In recent comments, Governor Bullock stated the Bank would not hesitate to lift rates if there was a ‘material’ upgrade to the inflation outlook. The same week, former RBA insider and Westpac’s newly appointed Chief Economist Dr Luci Ellis also claimed she had “seen enough” to believe that the RBA was all but certain to hike again.
Yesterday, Ellis doubled down on this view, saying multiple hikes could now be needed, and the International Monetary Fund (IMF) also weighed in, stating that higher interest rates were required to reduce inflation faster.
Long Way to Go- Federal Reserve Holds but Cautions Further Hikes Ahead
Fed Chairman Jerome Powell left the federal funds rate on hold between 5.25%pa and 5.50%pa once again, keeping rates steady at a 22 year high.
The decision to hold comes off the back of September’s U.S. CPI data which revealed inflation is increasing annually at 3.7%, significantly lower than a peak of 9.1% in June 2022, but still higher than the 2% target. Recent U.S. labour market data was also strong with the creation of 336,000 jobs in September.
The statement released was largely unchanged from what was issued previously, acknowledging that the U.S. banking system is “sound and resilient” and that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity”.
Eurozone Inflation Shrinks- Along with the Economy
Inflation in the eurozone shrank to 2.9%, reaching its lowest point in more than two years, down from 4.3% in September. The data will undoubtedly be welcomed news for rate setters, mortgagors, and cash-strapped consumers, but the economic picture is also deteriorating.
Germany, the largest economy in the eurozone saw economic output fall by 0.1%, following a 0.1% increase in the month prior. It was a similar story in France, the Eurozone’s second largest economy, recording growth of just 0.1%.
The term ‘technical recession’ continues to be thrown around it’s clear from the latest GDP data that the European economy has weakened substantially over the past.
Private Credit Growth in Australia Flatlines but Retail Sales Climb
Credit to the Australian private sector grew 4.9% over the year to September but increased just 0.5% for the month, only slightly higher than the 0.4% monthly average growth for 2023 and markedly lower than the 0.7% average in 2022.
While higher interest rates are undoubtedly curtailing lending, annual housing credit growth is running at its slowest pace since 2021 (4.2%pa), spending in other areas, notably retail sales, is increasing.
Year over year, sales were up 2% which was an increase from 1.6% in August. On a monthly basis, growth was 0.9% in September (beating expectations of 0.3%) with department stores and household goods performing the strongest, increasing by 1.7% and 1.5% respectively.
Bank of England Holds Rates Again
The bank of England (BoE) held rates once again at 5.25%pa as the economy continues to witness easing (albeit still high) inflation along with a weakened economy which grew just 0.2% in August.
Asian Manufacturing Activity Softens
Global demand for goods remains under pressure with inflation and geo-political tensions weighing on demand from Asian manufacturing hubs.
New PMI data released by S&P Global reveals that new orders and shrinking output, with both Japan and South Korea contracting at 48.7 and 49.8 respectively.
In South-East Asia, PMI data for Malaysia, Thailand, Vietnam, Singapore and the Philippines were all in contraction, with only Indonesia managing to post a positive result (52.3).
Final Thoughts
While inflation continues to subside across most major economies, higher interest rates and geo-political tensions are weighing on economic growth and spending, particularly in Europe.
Given the ongoing uncertainty, we believe that high quality corporate fixed-income continues to offer an attractive proposition for investors looking to diversify their portfolio and take advantage of the attractive rates currently on offer.
Last month, we announced our exclusive market-linked security for leading U.S. department store and retailer, Macy’s Inc, offering a 7.25%pa return paid quarterly over a 4-year term.
For more information or to reserve an allocation, click the link below or contact an adviser today.
Week Ahead
- RBA rate decision
- U.S. non-farm payrolls and unemployment
- U.K. GDP growth
- U.S. services PMI.
*Data accurate as at 13.10.2023
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