Australian Bond Exchange

Australian Bond Exchange Weekly Update

5th April 2024

Key points 

  • U.S. GDP data underscores America’s economic resilience
  • “Not done yet” – what we learned from Powell’s press conference
  • Australia’s housing market steamrolls higher
  • Australian retail sales disappoint

Global Cash Rates & Inflation 

U.S. GDP Data Underscores America’s Economic Resilience  

A slew of data released last week reveals that the American economy remains in robust shape, with GDP increasing by 3.4% in the fourth quarter and household spending increasing by 3.3% in the same period

Additionally, pre-tax corporate profits increased by 4.1%, the most since mid-2022.  

While inflation, as measured by the Fed’s preferred personal consumption price index (PCE) also increased by 1.8% in the fourth quarter, it was at the weakest pace since 2020. 

Collectively, the data provides further evidence that the U.S. economy is performing strongly which is dampening expectations of imminent rate cuts.   

The yield on U.S. Treasury bonds climbed to 4.4% pa, the highest level since November, while Fed Futures swaps have now reduced the likelihood of rate cuts in June to 62%, down from 86% last week. 

“Not Done Yet” – What We Learned From Powell’s Press Conference 

In recent comments, Federal Reserve Chairman Jerome Powell stated that the Federal Reserve was “not done yet” in its fight against inflation, while also stressing that “we don’t need to be in a hurry to cut”. 

This is all giving rise to the ‘one and done’ narrative – a scenario where the Federal Reserve only cuts once rather than three times.  

On the contrary, despite recent inflation data showing an increase in both January and February, Powell mentioned that it did not “materially change the overall picture” and that it was “too soon to say whether those readings represent more than just a bump”. 

Overall, Powell’s comments reaffirm that the Federal Reserve is in no hurry to cut continues to take a cautious and data-dependent approach.  

Australia’s Housing Market Steamrolls Higher  

Data released from CoreLogic reveals that home values across Australia climbed by 0.6% in March, marking the 14th consecutive month of growth. On a quarterly basis, price growth accelerated by 1.6% in the past three months, up from 1.4% in the previous quarter.  

Separate research shows that national property prices have surged 39.9% from March 2020 to March 2024, the third fastest boom in history.  

The rapid acceleration of property prices has prompted concerns over a spiralling property bubble, and that it could influence the RBA’s decision to leave rates on hold for longer.  

Australia Retail Sales Disappoint 

Australian retail sales data came in weaker than expected with a 0.3% gain in February, missing consensus forecast of 0.4%, while annual growth lifted to 1.6% from 1.2% in January. 

While some segments including clothing and department stores saw a strong increase of 4.2%, largely attributable to the ‘Taylor Swift effect’, these gains were offset by declines in the household goods and basic food segments. 

Overall, trend growth remains subdued however and is indicative of a weak consumer environment. 

Final Thoughts 

While expectations of imminent rate cuts are fading, the likelihood of further rate hikes also seems to be diminishing, given the trajectory of inflation and weak economic growth (outside of the U.S.).

Despite the geo-political uncertainty, and the fact that many of the world’s most advanced economies are already in (or flirting with) a recession, equity markets have for the most part been complacent.

However, as seen from the recent and vicious sell off, the environment is not devoid of risk, and investors should be cognisant of the strengthening headwinds.

In such an environment, we think corporate fixed-income is positioned well overall, where secured returns of 6-8%pa are currently achievable.

For more information, speak to an ABE adviser today.

Week Ahead 

  • Australia consumer confidence 
  • Australia business confidence 
  • U.S. inflation  
  • U.S. producer price index  
  • ECB interest rate decision  

*Data accurate as at 05.04.2024

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