Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 9th February  

Key points 

  • RBA holds the cash rate steady at 4.35%  
  • “Demand moderation is here”, say Australian businesses 
  • Chinese housing market woes persist   
  • OECD says rates need to stay high  

Global Cash Rates & Inflation 

RBA Holds the Cash Rate Steady at 4.35%pa 

This week the RBA held the official cash rate once again at 4.35%pa and while Governor Bullock struck a cautious tone in her first post-board meeting press conference, markets remain optimistic about the prospect of rate cuts. 

“We have made good progress, but there is more work to be done. The job is not done.” Michelle Bullock, Governor, Reserve Bank of Australia   

The key question is whether bond markets are accurately and realistically pricing the trajectory which the RBA will take. According to Judo Bank Chief Economist Warren Hogan, the nation’s ‘top economic forecaster’, markets are “getting ahead of themselves”. 

Despite both markets and politicians calling for lower rates, Governor Bullock has maintained composure in her almost five month tenure at the helm of the Central Bank.  

As Terry McCrann put it, the Governor has been effectively “flying solo” with Andrew Hauser, her newly-appointed Deputy Governor still yet to start as second in command at the Bank. 

Regardless of this, and as McCrann points out, Bullock has been successful in steering both the RBA’s operations and monetary policy in the right direction.

Diverging Views on Inflation   

The RBA also released its latest quarterly economic outlook which forecasts inflation may fall to 3.2% by December 2024, down from a forecasted 3.5% in November 2023 and just shy of the 2-3% inflation target band. 

Interestingly, Westpac believes that inflation will be within the target range by October which could see an accelerated rate cut timeline implemented. This once again highlights some of the divergence in views and underscores the importance of keeping an open mind, regardless of which trajectory inflation takes.  

The RBA expects economic growth of just 1.8% in 2024, down from previous estimates of 2% in November 2023.   

The unemployment rate was also revised upwards and is expected to hit 4.3%, in December 2024, up from, 4.2% in November’s 2023 forecast. By June 2025, it’s expected to reach 4.4%. 

Overall, the projections below reveal that the RBA is somewhat optimistic that inflation is moving in the right direction but still remains acutely alert to the possibility of a resurgence, and therefore wouldn’t rule out the prospect of further rate hikes. 

“Demand Moderation is Here”, Say Australian Businesses 

According to data released from the RBA’s business liaison program, Australian corporates have been experiencing a “clear slowing of demand” over the past 12 months.  

This, combined with the increasing cost of labour is weighing on profitability, which is prompting businesses to cut costs wherever possible.  

Notably, businesses said that while the cost of imported goods had declined significantly, certain domestic inputs such as logistics, fuel, utilities, insurance and professional services remained elevated.  

Chinese Housing Market Woes Persist  

While monetary policy in Australia appears to be somewhat effectively cooling the economy, various international uncertainties remain which ominously loom over the global soft-landing narrative.  

Just last week, a Hong Kong court ordered Evergrande, China’s second-largest property developer (by sales volume) to liquidate, leaving $US300 billion in liabilities in the lurch.  

Despite the Evergrande story stealing most of the headlines, there was also another high-profile casualty with Chinese shadow banking giant Zhongzhi Enterprise Group filing for bankruptcy.  

While the full extent of the damage is yet to be know, it’s possible that China’s beleaguered property sector weighs on overall demand for Australian key exports.  

OECD Says Rates Need To Stay High  

Global inflation is falling at a faster-than-expected rate, but the Organisation of Economic Development (OECD) has stated in its interim economic outlook that “monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained.”  

While messaging emanating from the RBA (and many other central banks) continues to strike a balanced and risk-aware tone, financial markets are becoming increasingly exuberant.  

In the OECD’s projections, the global economy is on course to hold up better than expected this year, easing from 3.1% in 2023 to 2.9% in 2024, revised upwards from a predicted 2.7% in November’s projection. 

Final Thoughts  

Given the litany of challenges facing the global economy, including the likelihood of recession, an unfolding Chinese debt crisis, and rising geopolitical tensions, investors should remain cognisant of the risks and position investment portfolios appropriately.  

 For more information about how corporate fixed-income can provide enhance stability in times of uncertainty, speak to an ABE adviser today. 

Week Ahead 

  • Australian consumer and business confidence  
  • UK unemployment data   
  • U.S. inflation  
  • U.S. retail sales  

*Data accurate as at 09.02.2024

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