Australian Bond Exchange Weekly Update
31st May 2024
Key points
- Aussie retail sales flatline
- Monthly inflation indicator higher than expected
- Construction activity slows
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 35%pa and the annual inflation rate in the year to May is 3.6%.
- The US cash rate (policy rate) is currently between 25%-5.5%pa and the annual inflation rate in the year to April is 3.4%.
- The Bank of England Bank Rate currently sits at 25%pa to fight an inflation rate of 2.3% in the year to April.
- The European Central Bank Cash Rate (deposit facility) is 00%pa, to fight an annual inflation rate of 2.4% in the year to April.
Aussie Retail Sales Flatline
Data released this week from the Australian Bureau of Statistics reveals that consumers are continuing to cut back on spending, underscoring the financial pain and uncertainty of the current economic environment.
While monthly turnover increased marginally by 0.1% on a monthly basis, it wasn’t enough to offset a decline of -0.4% in the previous month. Through the year, sales increased by a minor 1.3%.
The weak spending data is prompting concern from economists that it could trigger a wave of profit warnings as company earnings come under pressure, potentially putting dividend distributions at risk.
Monthly Inflation Indicator Higher Than Expected
Australia’s Monthly Consumer Price Index indicator increased from 3.5% in March to 3.6% in April, defying expectations of a fall to 3.4%.
While the monthly indicator is perceived to be less comprehensive than the quarterly indicator and more volatile, the increase reiterates that the inflation fight is not over yet.
For this reason, it seems that rates will likely remain higher for longer to ensure inflation is appropriately curtailed.
This positions corporate bonds and other fixed-income securities favourably, given the attractiveness and consistency of returns.
Additionally, investors concerned about the prospect of reinflation and the erosion of portfolio values could also consider allocating to inflation-linked securities, such as Sydney Airport, which can provide insulation in such a scenario.
Construction Activity Slows
In what is yet another sign of Australia’s softening economy, construction activity declined by 2.9% in the March quarter, following a 1.8% increase in the December quarter.
Contractions in activity were seen across various segments including building construction (-3.7%), non-residential works (-7%), infrastructure (-2.1%), and residential construction (-1.2%).
The decline in activity is largely attributable to high construction costs, labour shortages and a lack of pre-sales as buyers choose existing homes over new ones.
Final Thoughts
While the Australian economy appears to be heading in the right direction, vis-à-vis falling retail sales, rising unemployment (from a historic lows), and weakening business activity, the RBA could be one bad inflation report away from hiking rates, as reported in the Australian Financial Review.
As always, investors should remain vigilant and open to a range of possibilities with regard to the future path of interest rates and inflation, and position their fixed-income portfolios accordingly.
For more information about how corporate bonds and fixed-income can work within investment portfolios, speak to the Australian Bond Exchange today.
Week Ahead
- Australia GDP growth
- ECB interest rate decision
- U.S. jobs and unemployment
*Data accurate as at 31.05.2024
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