Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 1st September 

Key Points 

  • Australian Inflation cools more than forecasts 
  • Matildas boost Australian retail sales but growth rate flatlines  
  • Rising debt costs in focus for Australian corporates 
  • Global interest rates higher for longer?  

Global Cash Rates & Inflation

  • The Reserve Bank of Australia (RBA) Cash Rate sits at 4.1%pa with an interest rate decision looming next week. Current inflation sits at 4.9% for the year to July. 
  • The UK cash rate sits at 5.25%pa, to fight an inflation rate of 6.8% in the year to July.   
  • The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate in the year to August is 3.18% 
  • The ECB Cash Rate is 4.25%pa, to fight an annual inflation rate of 5.3% in July   

Australian Inflation Cools More Than Forecasted 

The monthly Consumer Price Index (CPI) increased 4.9% in the 12 months to July which was less than the forecasted 5.2% and is down from a 5.4% increase in the 12 months to June.  

The most significant contributors to the July annual increase were housing (7.3%) and food and non-alcoholic beverages (5.6%) but overall CPI continues to decline from a peak of 8.4% in December 2022. 

The latest data provides further evidence that interest rate hikes are working to take the heat out of the economy, prompting increased speculation that interest rates could begin to turn lower sooner than expected.  

Consumer’s Resilient But Growth Rate Continues to Weaken 

Australian retail sales beat forecasted expectations and increased by 0.5% compared to the previous month, largely attributable to the Women’s World Cup 

While sales were also up 2.1% compared to July 2022, the underlying growth rate in consumer spending is weakening as interest rates and cost pressures bite.  

While the data in no way suggests a collapse in consumer spending is imminent, the softer outlook is still likely to weigh on growth assets including property and shares.   

It was a similar story in the UK with retail sales for July falling by their most in two years and by an estimated 1.2% from the previous month.      

Rising Debt Costs in Focus  

Despite the litany of challenges facing Australian businesses including a slowing Chinese economy, weakening consumer demand, and increased cost pressures, corporate earnings largely defied negative expectations. 

While these results are undeniably positive and strengthen the notion that a soft landing can be achieved, as the Australian Financial Review points out, the worst thing about this earnings season are the forecasts.   

Unsurprisingly, since the beginning of the reporting season, the ASX200 has declined over 2.5% at the time of writing, despite currently experiencing a resurgence. 

‘Entrenched Inflation’

 Last week on Friday, Federal Reserve Chairman, Jerome Powell expressed his concerns over sticky inflation amid a very strong U.S. labour market, reiterating that central banks stand ready to continue hiking.  

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”  
Jerome Powell, Chair of the Federal Reserve of the United States 


Similar statements were also issued from President of the European Central Bank, Christine Lagarde, and Deputy Governor Ben Broadbent of the Bank of England.  

Whether inflation starts to recede more aggressively or not, a weaker and more uncertain earnings outlook materially increases the attractiveness of fixed income investments.  

Corporate bonds offer investors a reliable source of fixed income which is paid out at regular intervals and currently offer attractive rates due to market conditions.   

While not without risk, corporate bonds generally provide a superior rate of return to government bonds and exhibit far less volatility than equity markets.  

What’s Coming Up?

  • A looming RBA interest rate decision on Tuesday 5th September 
  • A slew of Australian economic data including the GDP growth rate, services PMI and balance of trade   
  • And plenty of high impact U.S. economic data including non-farm payrolls, unemployment and manufacturing PMI 

*Data accurate as at 31.08.2023 

Disclaimer: This article has been prepared by Australian Bond Exchange Pty. Ltd (ACN 605 038 935, AFSL 484453) (“ABE”) and is of a general nature only. It was prepared without considering your financial needs, circumstances and objectives. Before investing in a fixed-interest product with ABE, you should consider whether it is appropriate for your circumstances and review the relevant terms and conditions. This article contains links to other third-party websites, some of which require a subscription to read. Such links are for your convenience only, and ABE does not recommend or endorse these third-party sites.. No representation or warranty is made as to the accuracy, completeness or reliability of any estimates, opinions, conclusions, or other information contained in the content. The content may contain certain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors, many of which are beyond our control. To the maximum extent permitted by law ABE disclaims all liability and responsibility for any direct or indirect loss or damage that you may suffer as a result of relying on anything in this content. Past performance is not an indication of future performance. 

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