Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 16 February  

Key points 

  • U.S. inflation rises more than expected 
  • Aussie consumer confidence up, business confidence down 
  • UK inflation holds steady
  • Australian unemployment hits a 2-year high
  • What we can learn from CBA’s earnings. 

Global Cash Rates & Inflation 

U.S. Inflation Rises More Than Expected

Despite the annual CPI inflation rate falling to 3.1% in January from a 3.4% increase in December, the result came in higher than the forecasted 2.9%.

This sent equity markets lower while Treasury yields moved higher as market participants reassessed the likelihood of early rate cut expectations.

As reported, the decline in inflation will not be linear and there are likely to be bumps along the way.

Unfortunately for equity holders, this will likely translate into higher levels of volatility given markets seem to be overly optimistic; in recent weeks both the U.S. S&P 500 and Australian S&P ASX 200 made new all-time highs.

For those seeking greater portfolio stability, moving into bonds and other fixed-income assets can help to reduce fluctuations in the return on ‘held to maturity’ portfolios.

Conversely, a ‘higher for longer’ interest rate environment undeniably benefits fixed-income investors who get paid to wait patiently for the inflation story to resolve itself – at currently very attractive rates.

In the U.S., the probability of a March quarter-point cut has fallen below 10% from 16% the previous day, and by 76% a month ago.

Aussie Consumer Confidence Up, Business Confidence Down   

Consumer confidence data compiled and released by the Westpac Melbourne Institute saw the Index jump by its biggest monthly increase since April last year, rising 6.2% to 86.

While the Index is still in deeply negative territory, it shows that Australian consumers are feeling somewhat more optimistic about the prospect of easing inflation and monetary conditions.

It’s a different story for businesses however with additional data released from NAB revealing that conditions continue to wane as the economic slowdown rolls on.

While the Business Confidence Index increased by a marginal +1 point, pulling itself out of negative territory, the Business Conditions Index slid 2pts to +6 which is markedly lower than the +13 points it was at six months prior and +20 points from a year ago.

The Trading Conditions Index, seen as a gauge of sales also fell and is now deeply in negative territory, sitting at -20.

The divergence in views between consumers and businesses is a further indication of the uncertain environment.

UK Inflation Holds Steady 

The UK’s annual CPI inflation rate held steady at 4% in January, beating an expected 4.1% rise.

On a monthly basis, the CPI fell 0.6% as food and non-alcoholic beverages, clothing and footwear, and household goods led the declines, while the upwards contributions were led by housing and household services.

Annual core CPI increased by 5.1% in the year to January 2024, the same rate as in November 2023 and December 2023, and down from a recent high of 7.1%.

Services inflation alone increased to 6.5%, up from 6.4% in December.

Australian Unemployment Hits a 2-Year High  

The unemployment rate hit 4.1% in January with the number of unemployed people increasing to 22,000.

Overall, just 500 jobs were added to the economy in January while underemployment – the measure of those currently working but looking for additional hours – also increased from 6.5% in December to 6.6% in January.

The data is the latest indication that the Australian economy is continuing to slow under the weight of higher interest rates.

What We Can Learn From CBA’s Earnings 

CBA’s latest earnings reveal that the nation’s largest lender made a net cash profit of $5 billion for the six months to December 31. While the result beat earnings guidance, cash profit was down 3% from the previous period, indicating that while the banking system remains resilience, weakness is starting to creep in.

The Bank cautioned it had seen an uptick in arrears and impairments, but they remained a small portion overall of personal loans (1.14%) and mortgages (0.52%).

While CBA has $34 billion in fixed-rate home loans due to expire before June, the relatively benign and orderly decline in lending conditions is a far cry from the ‘mortgage cliff’ narrative being peddled last year.

“The economy has been fairly resilient, supported by a strong labour market, savings and repayment buffers, population growth and relatively high commodity prices.

“However, downside risks are building as slowing demand and persistent inflation impact Australian businesses.”

Matt Comyn, CBA, Chief Executive Officer

Final Thoughts 

Inflation continues to trend lower, but this pace of slowing may be losing momentum. While Interest rates are still expected to fall this year across most major developed economies, early-rate cut expectations may be overblown.

Should inflation see a resurgence, then an extended period of constrained spending and weaker earnings could be the ‘new normal’ for some time. While this could be problematic for growth assets, we think it puts corporate fixed-income in a competitive position.

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

Week Ahead

  • U.S. Retail sales
  • RBA meeting minutes
  • FOMC meeting minutes
  • U.S. consumer sentiment

*Data accurate as at 16.02.2024

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