Australian Bond Exchange

Australian Bond Exchange Weekly Update

10th May 2024

Key points 

  • RBA signals higher rates warning as attention shifts to the Federal Budget  
  • Weakness in consumer spending persists   
  • Bank of England holds as economy continues to weaken 
  • Sweden’s Riksbank cuts

Global Cash Rates & Inflation 

RBA Signals Higher Rates Warning As Attention Shifts to the Federal Budget 

As we mentioned earlier this week, the RBA’s decision to hold rates steady was largely expected as the Bank awaits further data to determine whether the current monetary policy settings are sufficient. 

“We don’t think we necessarily have to tighten again, but we can’t rule it out. If we have to, we will. If we really think inflation is going to be persistent and significantly above our forecast, we will tighten again.” 

Michelle Bullock, Governor, Reserve Bank of Australia 

While rates will undoubtedly stay higher for longer, with the Federal Budget due to be announced next Tuesday, focus is now shifting to fiscal policy, and specifically whether it is doing enough to combat inflation.  

In the RBA’s latest Statement of Monetary Policy, the Bank expects government spending to grow by 3.2% in the year to June 2024, up from its earlier forecast of 2.2%. 

While we need to wait until next Tuesday to ascertain just how inflationary the Federal Budget may be (hello stage 3 tax cuts), the short-to-medium term is still broadly constructive for fixed-income and other debt securities with rates remain relatively high (compared to recent rate levels) while the economy slows. 

Weakness in Consumer Spending Persists  

Australian retail sales continue to be gripped by pervasive weakness, with the March quarter data seeing a 0.4% decline vs a 0.3% expected decline.  

This is the fifth decline in the last 6 quarters and according to Westpac, “the speed and scale of the per capita spend wind-back remains unprecedented in the 40yr history of the retail survey.” 

On a per capita basis, retail spending declined 3.6 per cent over the past year. 

Weaker consumer spending should translate to business cost cutting and dampen economic growth, which means the trajectory of the economy seems to be on the right track.  

As such, corporate fixed-income investors have the opportunity to lock in desirable returns now, while also benefiting from any potential rate cuts which may materialise in 2025.

Bank of England Holds as Economy Continues to Weaken 

The Bank of England also held its key policy rate steady at 5.25%pa in a move which was largely expected.  

Inflation has moderated meaningfully in the UK despite sticky wages growth, and there is mounting speculation that it could be one of the next major economies to commence monetary easing.  

Sweden’s Riksbank Cuts Rates 

Sweden’s Riksbank cut its official interest rate to 3.75%pa from 4.00%pa this week, and said it was likely to cut twice more 2024.  

The move provides further evidence to suggest that Europe could be on the cusp of commencing monetary easing.  

It also highlights the growing divergence of monetary policy in Europe compared to the U.S. and Australia, where the prospect of further rate hikes is still a possibility.  

Final Thoughts 

From a domestic perspective, while it’s important to remain cognisant of the potential for upside surprises in inflation, as mentioned above, the trajectory still seems to be on the right path.  

Additionally, with the Australian economy continuing to weaken, we think corporate fixed-income is positioned well to deliver stable and consistent risk-adjusted returns within the 6-8%pa range. 

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

Week Ahead

  • Australian Federal Budget  
  • NAB business confidence survey 
  • U.S. inflation and retail sales  
  • UK unemployment

*Data accurate as at 10.05.2024

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