Australian Bond Exchange

Australian Bond Exchange Weekly Update

3rd May 2024

Key points 

  • Federal Reserve holds but signals no rate hikes 
  • Australian retail sales remain weak 
  • Eurozone growth surprises as inflation steadies 
  • All eyes on the Australian Federal Budget

Global Cash Rates & Inflation 

Federal Reserve Holds But Signals No Rate Hikes  

The U.S. Federal Reserve held the fed funds target rate steady once again at its 5.25% – 5.5% pa target range, citing a “lack of progress” on fighting inflation while also signalling that rates were “sufficiently restrictive”. 

“I think it’s unlikely that the next policy rate move will be a hike”. 

Jerome Powell, Federal Reserve Chairman 

Despite increasing speculation that the Federal Reserve would need to start hiking rates again to combat sticky inflation, Powell’s comments seemingly rebuffed this view, triggering a strong reaction from financial markets.  

The yield on two-year U.S Treasury Bonds fell to 4.95%pa from 5.01%pa while the 10-year U.S. Treasury Bond yield also moved lower.  

Australian Retail Sales Remain Weak 

Australian retail sales came in weaker than expected for March, falling by 0.4% and missing a forecasted 0.2% increase. Annually, the sales turnover rate dropped to 0.8%. 

All categories excluding food retailing experienced declines with clothing falling 4.3%, department stores falling 1.6% and household goods falling 1.4%. 

The data underscores that Australian consumers continue to experience financial pain under the weight of still high inflation and interest rates. 

This view was reaffirmed by Coles Chief Executive Leah Weckert, who stated in an interview this week that consumers were opting for sparkling wine over champagne and cheaper home brands. 

Additionally, Nestle Australia’s latest earnings revealed a 9% jump in its pre-mixed cappuccino sachets in what is the latest indication that Australian consumers are cutting back on their discretionary spending. 

While there has also been increased speculation in Australia about the prospect of interest rate hikes (rather than cuts), the weaker sales data may give the RBA reason for pause.  

Eurozone Growth Lifts Economy Out Of Recession 

The eurozone economy saw stronger-than-expected economic growth of 0.3% during the first quarter of 2024, beating expectations of a 0.2% expansion.

Germany, the largest economy in the 20-country bloc saw a 0.2% expansion following a -0.5% contraction in the previous quarter, while France, Italy and Spain also experienced stronger-than-expected growth, collectively pulling the Eurozone out of a mild technical recession. 

Inflation across the eurozone was also stable, holding steady at 2.4% in April 2024 while core inflation slowed to 2.7%. The data can be seen as constructive for the European Central Bank (ECB) to cut rates in the coming months. 

All Eyes On The Australian Federal Budget 

 With just a few weeks until Treasurer Jim Chalmers unveils the Australian Federal Budget, scrutiny is growing over the spending policies of  Commonwealth and State governments, who are spending $50 billion a year more than before the pandemic.  

From infrastructure spending to NDIS funding, public sector investment was 5.5% of GDP according to the September quarter national accounts, and this is influencing inflation within the Australian economy.  

Final Thoughts 

Despite the Federal Reserve pouring cold water on the prospect of an imminent interest rate hike, the higher for longer narrative remains in play. 

In Australia, while some are expecting the RBA to hike rather than cut, it seems probable that rates remain in hold for some time, which undeniably positions fixed-income well. 

For more information about how corporate fixed-income can benefit investment portfolios, contact the Australian Bond Exchange today. 

Week Ahead

  • RBA interest rate decision  
  • Bank of England interest rate decision  
  • UK GDP growth rate  
  • NAB business confidence 

*Data accurate as at 3.05.2024

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