Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 2nd February  

Key points 

  • Fed holds steady but signals cuts  
  • Australian inflation eases to 4.1% in December  
  • Why the RBA is likely to hold  
  • Aussie retail sales slide lower  
  • Euro Area dodges recession 

Global Cash Rates & Inflation 

Fed Holds Steady but Signals Cuts 

The U.S. Federal Reserve has kept its policy rate unchanged at 5.25%-5.5% pa in its first rate decision for the year.  

Language emanating from the Fed wasn’t overly hawkish or dovish and seemed to reiterate the long-standing view that despite inflation moderating, the central bank wanted to see more evidence before considering rate cuts. 

“In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks”. 

FOMC Statement, January 31, 2024 

Australian Inflation Eases to 4.1% in December  

Australian CPI data released this week underscores that inflation continues to moderate and remains on a downward trajectory. 

The inflation rate on an annualized basis dropped from 5.4% in September to 4.1% in December while it slowed to 0.6% on a quarterly basis in the three months to December, down from 1.2% in the previous period.  

The data beat market expectations which forecast an annual rise of 4.3% and a quarterly rise of 0.98% and strengthens the case for rate cuts this year. 

The most significant contributors to inflation during the December quarter were Alcohol and tobacco (+2.8%), Insurance and financial services (+1.7%), and Housing (+1.0%). 

Why The RBA Is Likely to Hold  

Following the weaker-than-expected inflation data, Australian Government bond yields have plummeted as market participants sharpen expectations of rate cuts.  

Some economists are even floating the notion that the RBA could commence an easing cycle as soon as May. 

Money market traders are now fully pricing the first 0.25 of a percentage point cut to the 4.35% cash rate in August, from September before the inflation data. 

Aussie Retail Sales Slide Lower 

Retail sales fell 2.7% in December following a 1.6% increase in November which was largely attributable to Black Friday and Cyber Monday sales.  

Importantly, the decline is the biggest on record since the pandemic lockdowns and reveals that consumers are tightening their purse strings amid higher cost of living expenses and interest payments on mortgages. 

Household goods retailing recorded the largest fall (-8.5%) followed by steep declines in spending on clothing, footwear and personal accessories (-5.7%). 

Despite enduring one of the fastest interest rate hiking cycles in recent history, the Australian economy has remained broadly resilient overall however, some cracks are starting to emerge.  

Approximately 65,000 jobs were lost in December and just this week we saw vacuum retailer Godfrey’s file for bankruptcy, attributable to lower customer demand, higher operating costs, and increased competition.

Euro Area Dodges Recession  

The European economy flatlined in the final three months of 2023, recording no growth but beating analyst expectations of a 0.1% contraction which would have met the definition of a technical recession (two consecutive quarters of negative growth).  

The German economy contracted by 0.3% for the quarter while France, Italy and Spain saw increases of 0.6%, 0.1% and 1.9% respectively. 

Despite the prevailing weakness in the European economy local share markets including the German DAX 40 and French CAC 40 are trading at or just under all-time highs. While analysts expect growth to improve in 2024, investors should consider whether certain equity valuations and justified.  

Over the course of 2023, the European economy grew by a modest 0.5%. 

Final Thoughts  

Rate cut expectations are growing and equity markets seem to be responding with extreme optimism and exuberance.  

Upcoming central bank statements and economic indicators will likely cause heightened volatility, and any unexpected curve balls could quickly dispel the good vibes. 

Regardless of the path ahead for cash rates, corporate bonds and other fixed-income securities continue to be positioned well, both as an attractive portfolio diversifier and income generator with average yields higher than the average dividend yield of the ASX / S&P 200.  

For more information about available investment opportunities, contact your ABE adviser today. 

Week Ahead 

  • RBA interest rate decision  
  • Aussie services PMI 
  • U.S. services PMI 
  • Euro Area retail sales  

*Data accurate as at 2.02.2024

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