Australian Bond Exchange Weekly Update
Friday 8th September
Key Points
- RBA Holds Cash Rate Steady for Third Consecutive Month
- September is Statistically the Worst Month for Equity Market Performance
- Australian GDP Beats Expectations With a 0.4% Expansion in the June Quarter
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate remains unchanged at 4.1%pa as inflation cools.
- The UK Bank Rate currently sits at 2.5%pa to fight an inflation rate of 6.8% in the year to July.
- The US Fed Funds Rate (policy rate) is currently between 2.5-5.5%pa, and the annual inflation rate in the year to August is 3.2%.
- The ECB Cash Rate (deposit facility) is 4.25%pa, to fight an annual inflation rate of 5.5% in the year to June.
RBA Holds Cash Rate Steady for Third Consecutive Month
Outgoing RBA Governor Phillip Lowe has left the official cash rate on hold at 4.1%pa for his final meeting at the helm of Australia’s central bank.
The decision follows last week’s inflation data which revealed a further cooling in the economy as the CPI indicator, excluding volatile items and travel, came in lower than expected, increasing by 5.8% in July, down from a rise of 6.1% in June.
Have Interest Rates Peaked?
The burning question on everyone’s mind is – have interest rates peaked?
While a strengthening chorus of economists and market commentators appear to think so, it’s possible that rates remain at elevated levels for some time before any decision is made.
As reported in the Australian Financial Review, the yield on 3-year Government Bonds is 3.83%pa which implies the market expects a cut to rates by 2026. Additionally, the 10-year Government Bond is currently yielding 4.16%, indicating no further cash rate hikes are currently expected.
Of course, any resurgence of inflation would undoubtedly trigger market volatility and reignite fears of future hikes, as Lowe cautioned in his remarks:
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks”.
What Does it Mean for Investors?
Fixed income investments such as high quality corporate bonds and bond-linked securities provide an investment option which offers stable returns in an uncertain economic period.
Today, some fixed-income securities are yielding upwards of 6-8% per annum, providing investors with the opportunity to lock in a stable and regular income stream at attractive rates.
The September Effect
The S&P/ASX 200 has recovered some of the lost ground during reporting season, but as the market fully digests the uncertain outlook, including the fact that quarterly company profits were 12 per cent down from a year earlier (the largest year-on-year fall in more than a decade), plenty of uncertainty lingers.
It’s also worth noting that seasonally, September is the worst performing month on record for the S&P 500, which has delivered an average monthly return of negative 0.73% since 1945.
While October and November tend to perform better, the volatility underscores the importance of multi-asset diversification which can smooth out portfolio returns over the long-term.
Australian GDP Beats Expectations
The Australian economy expanded 0.4% in the second quarter, beating expectations of a 0.3% increase and was higher than the 0.2% increase in the previous quarter.
The annual growth rate slowed however to 2.1% with weaker household spending and productivity growth dragging on the overall economy. Additionally, after taking into account an increase in population due to migration, real GDP on a per capita basis fell by 0.3%.
Overall, it was a largely expected result with Federal Treasurer Jim Chalmers stating
While we have been clear and upfront that we expect our economy to slow considerably over the next year, we enter this period of uncertainty from an enviable position”.
What’s Coming Up?
- An action-packed week with various high-impact U.S. data releases including CPI, retail sales, PPI and unemployment across both Wednesday and Thursday.
- The European Central Bank will consider whether to raise key interest rates next Wednesday.
- The U.K. will also release its latest GDP growth figures on Wednesday.
- Australia will release its latest unemployment data on Thursday.
*Data accurate as at 31.08.2023
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