Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 6th October 

Key Points 

  • New captain, same course – RBA holds again
  • New lows for the ASX – 2023 gains mostly wiped
  • Positive PMIs – U.S. manufacturing picks up while services remain in expansion
  • U.S. job openings increase in August
  • Hopes rise for Chinese stabilisation
  • Rolls-Royce Reactors

Global Cash Rates & Inflation

New Captain, Same Course – RBA holds Again

The RBA held the official cash rate once again at 4.1% for the October meeting, a result which was largely expected by the market.

The statement issued by the RBA’s new Governor, Michele Bullock, reiterated concerns from previous statements, including that services and rental inflation were continuing to rise ‘briskly’.

Unsurprisingly, the statement again floated the notion that further rate hikes could be necessary to ensure inflation returns to target in a reasonable timeframe.

Bullock also said that the RBA anticipates inflation to revert to its target range towards the end of 2025, but that increasing fuel costs and rents will likely be problematic for that goal to be achievable.

Overall, the evidence suggests that rates are likely to stay higher for longer, and potentially move a little higher, before starting to come down.

New Yearly Lows for the ASX 200 – 2023 Gains Wiped

The ASX 200 this week made fresh new lows, erasing much of 2023’s gains as uncertainty and investor skittishness begin to weigh on sentiment and outlook.

As the AFR reports, it has actually been three lost years for Australian equity investors given valuations are now back at February 2020 levels.

The most recent bout of selling comes as the 10-year U.S. Treasury yield hit 4.7% this week, the highest point since 2007.

The rapid advance of fixed-income yields has forced investors to reconsider and recalibrate asset class weightings and is effectively sucking money out of equity markets.

Given this backdrop, it seems unlikely that the ‘free ride,’ which equity investors often enjoy in the final quarter of the year will materialise.

For investors, the prevailing uncertainty reiterates the importance of constructing investment portfolios which are positioned to weather all sorts of environments, including one where interest rates and inflation stay higher for longer.

Positive PMIs

The U.S. ISM report on the manufacturing sector revealed yet another contraction in September, marking the 11th consecutive month of negative growth. However, the reading of 49% beat expectations of 47.6% and is the highest reading since November 2022.

It’s also the third month of positive change, so while the sector is still contracting, a return to expansion might not be too far off (a reading above 50 indicates an expansion).

On the U.S. services front, the latest S&P Global Services PMI reading came in at 50.1 which keeps the service sector in expansion for the eighth consecutive month. Nevertheless, the reading was below the forecasted 50.2 and suggests that trend growth is weakening.

U.S Job Openings 

Despite the Federal Reserve hiking interest rates 11 times, the U.S. economy is still chugging along with the latest figures from the Job Openings and Labor Turnover Survey (JOLTS) revealing 9.6 million available jobs, up from 8.92 million in July.

The findings underscore both the strength and tightness of the U.S. labour market which is problematic from the Federal Reserve’s perspective as it grapples with sticky inflation and a heated economy.

China Stabilisation

China’s factory activity expanded in September, the first time in six months, offering hope that the world’s second largest economy could be rebounding after a bout of prolonged weakness.

The purchasing managers’ index (PMI) increased to 50.2 in September from 49.7, according to the National Bureau of Statistics, transitioning from contraction to expansion.

Rolls-Royce Reactors

Australia’s $368 billion SSN-AUKUS attack submarines will be powered by nuclear reactors, designed, and engineered by Rolls-Royce.

While predominantly known as a luxury car maker, Rolls-Royce also manufactures aerospace, marine, and industrial gas turbines for civil and military aircraft.

As the primary builder of the Royal Navy’s marine reactors for the past 60 years, the company is undoubtedly well positioned to serve the Royal Australian Navy.

Fixed-income investors looking to gain exposure to Rolls-Royce have the opportunity to do so via the Australian Bond Exchange’s, Australian Dollar, fixed coupon bond-linked note.

For more information, speak to an adviser today.

What’s Coming Up?

  • U.S. unemployment and non-farm payrolls
  • Westpac consumer confidence index and NAB business confidence index
  • U.S. inflation, FOMC minutes, PPI, and more
  • Chinese inflation data
  • UK gross domestic product

*Data accurate as at 15.09.2023 

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