Australian Bond Exchange Weekly Update
12th April 2024
Key points
- U.S. inflation climbs to 3.5% as yields surge
- Aussie consumer confidence slides
- European Central Bank holds but signals monetary easing to come
- Middle East tensions ratchet up
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to February is 3.4%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to March is 3.5%.
- The Bank of England Bank Rate currently sits at 25%pa to fight an inflation rate of 3.4% in the year to February
- The European Central Bank Cash Rate (deposit facility) is 00%pa, to fight an annual inflation rate of 2.4% in the year to March.
U.S. Inflation Climbs to 3.5% As Yields Surge
Inflation in the U.S. came in hotter than expected for March, strengthening the case for delayed rate cuts which had been previously touted to arrive as early as June.
The 3.5% inflation reading exceeded forecasts of 3.4% and was up from 3.2% in February. Core inflation which strips out volatile food and energy costs remained unchanged at 3.8% from the previous month and was higher than forecasts of 3.7%.
The data is problematic for the Federal Reserve which had previously signalled its intention for several rate cuts this year.
Futures markets lowered rate cut expectations to price in between one and two quarter-point cuts this year — down from at least six cuts early in January.
Yields on U.S. Treasury Bonds climbed higher as a result with the 2-year yield rising to 4.97%pa and the 10-year rising to 4.59%pa.
Aussie Consumer Confidence Slides
Consumer sentiment data released from the Westpac Melbourne Institute reveals that pessimism remains in the doldrums.
The Consumer Confidence Index declined by 2.4% to 82.4 points in April, down from 84.4 points in March.
While the outlook for family finances over the next 12 months increased by 1.8% compared to the previous month, most other metrics experienced a decline.
Economic condition expectations over the next 12 months fell -2.7% from the previous month while economic condition expectations over the next 5 years fell -4.4%. The time to buy a major household item sub-index was also down -6.6%.
The extended slump is one of the longest since the survey began in the mid-1970s.
European Central Bank Holds but Signals Monetary Easing to Come
The European Central Bank held its deposit facility steady at 4%pa, but signalled to the market that monetary easing was imminent as inflation continues to recede.
Inflation in the Euro Area has dropped from highs of 10.6% in October 2022 to 2.4% in March 2024, while GDP growth has slowed materially.
Last month the Swiss Central Bank cuts its official policy rate, raising speculation that the European Central Bank could be the next central bank to commence monetary easing, as early as June.
Middle East Tensions Ratchet Up
Tensions are reaching boiling point in the Middle East as the U.S. warned Israel of an imminent attack by Iran after the former launched airstrikes against an Iranian consulate building in Syria.
While the Israel-Hamas war has remained relatively contained to date, a direct conflagration between Israel and Iran could plunge the broader region into war.
Not only would this be disastrous for global stability, but it would have severe ramifications for the global supply of oil and other goods.
Iran has threatened to close the Hormuz Strait which sees approximately a fifth of the world’s oil supply pass through it each day.
Final Thoughts
With geo-political tensions increasing and sticky inflation forcing financial markets (and likely central bankers) to reassess the prospect of early rate cuts, investors should remain cognisant that a range of possible scenarios remain in play.
Just this week, JP Morgan’s Chief Executive Officer Jamie Dimon warned that U.S. interest rates could increase as high as 8%pa, and that “bullish investors betting on falling inflation and imminent interest rate cuts are underestimating the chances of the US slipping into recession
Week Ahead
- Australia consumer confidence
- Australia business confidence
- U.S. inflation
- U.S. producer price index
- ECB interest rate decision
*Data accurate as at 12.04.2024
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