Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 15th December 

Key points

  • Federal Reserve holds again – signals rate cuts in 2024  
  • U.S. inflation continues to ease 
  • Aussie consumer confidence up, business confidence down   
  • Time to reposition? 
  • Future of payments – ABE partners with ANZ for first ever billing initiation solution

Global Cash Rates & Inflation 

Federal Reserve Holds Again

The Federal Reserve has held the federal funds rate steady at 5.25% – 5.5%pa in its final meeting for 2023 and has hinted that numerous rate cuts could be coming in 2024.

In its FOMC statement, the Fed conveyed that officials would consider the extent of “any additional policy firming” and that “recent indicators suggest growth of economic activity has slowed” while “job gains have moderated”.

Despite inflation remaining elevated in the U.S., the decision to hold rates steady for the third consecutive meeting reinforces the view and likelihood that the next rate move from the Fed could be down.

In its most recent rate projection for 2024, the median forecast currently sits at 75 bps of rate cuts.


U.S. Inflation Continues to Ease

The U.S. annual inflation rate fell to 3.1% in November, down from 3.2% in October, providing further evidence of a downward trajectory.

For many, the results will reaffirm the view that the Fed’s monetary policy settings are working to cool the economy however, it’s important to note that inflation remains sticky within certain components.

Core inflation which excludes food and energy costs increased by 0.3% in November which was marginally higher than the previous month. While the energy component saw the largest decline, dropping 2.3% for the month, utility and energy services saw the largest increases of 2.8% and 1.7% respectively.

The bottom line is that while inflation is undoubtedly cooling overall, the Fed probably won’t be taking victory laps anytime soon.

Consumer Confidence Up, Business Confidence Down

Australian consumer confidence increased 2.7% over the month, climbing to 82.1 which is the highest level since February of this year.

While sentiment remains in deeply pessimistic territory (100 is neutral), it suggests that consumers are somewhat more upbeat following the RBA’s decision to hold rates steady in December.

Business confidence data released by NAB was less rosy, revealing that pessimism has sunk to -9 (0 being neutral), the lowest levels since 2012 (excluding during the COVID-19 pandemic).

The data shows that price pressures accelerated by 2.2% for the quarter while profitability fell 5 points to +6 and sales falling 6 points to +13.

Time to Reposition?

U.S. Treasury yields have plummeted from 5%pa to just above 4%pa (at the time of writing) within a matter of months as markets continue to price in rate cut expectations.

While centrals bankers have largely continued to talk tough, the easing of inflation and slowing of economic growth provides compelling evidence that we are at, or very near the peak of this hiking cycle.

This begs the question, is now the time to reposition investment portfolios?

Time In The Market Not Timing The Market

Whether interest rates start to decline in 2024 or they remain on hold for longer than expected, the current opportunity set within fixed income is undeniably attractive, and it seems many others are subscribing to this view.   

While some may be tempted to hide in cash, with the RBA’s policy rate sitting at 4.35%pa and the annual inflation rate at 4.9%, investors would be receiving a negative real return.

Conversely, returns within corporate fixed-income instruments are ranging from 6-8% per annum, including those issued by the ‘Big Four’ Australian banks.

As a result, the asset class is undeniably well positioned to provide investors with a desirable income stream.

Future of Payments

ABE has partnered with ANZ for the launch of the bank’s native PayTo billing solution for businesses.

The service is expected to revolutionise the existing account-to-account payments experience and has been built specifically to initiate one-off and recurring payment agreements between billers and customers.

ABE is pleased to have participated in the launch and to have been involved in the execution of the bank’s first PayTo Biller  agreement and initiation on the service.

Commenting on the launch, ABE Chief Executive Officer Bradley McCosker said:

“Using ANZ’s PayTo biller functionality, we’re able to provide our clients with the ability to confirm and settle transactions in real time.

“Not only does this help to deliver trust and security in the payments system, but it reaffirms our commitment to empowering Australian investors and providing them with the tools and information needed to make excellent financial decisions.”

Week Ahead 

  • U.S. GDP growth data (quarterly)
  • RBA meeting minutes
  • U.S. personal consumption data
  • UK retail sales
  • Bank of Japan interest rate decision
  • German consumer confidence

*Data accurate as at 15.12.2023 

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