Australian Bond Exchange

Australian Bond Exchange Weekly Update

Friday 24th November 

Key points

  • Hawkish undertones over homegrown inflation
  • Sufficiently restrictive – J Powell
  • Westpac Leading Index for October dips
  • Sohn Hearts and Minds – bullish on bonds
  • Is the narrative starting to change?

Global Cash Rates & Inflation

RBA Minutes Reveal Hawkish Undertones Over Homegrown Inflation

The latest RBA minutes reveal that members of the Board agreed that further tightening of monetary policy could be required as concerns rise over businesses developing an ‘inflationary mindset’.

The comments state that while long-term inflation expectations are largely “anchored”, there had been a noticeable uptick in businesses passing on cost increases to consumers.

Demand Not Supply

According to the RBA, this is largely attributable to domestic aggregate demand exceeding aggregate supply, rather than imported energy inflation or supply-side rental inflation.

It was highlighted that domestic demand pressures were a key driver in prompting the RBA to raise the official cash rate in November and could be a catalyst for further hikes in the future.

“There is a bit of a perception around that inflation at the moment is really all supply driven…but there is actually an underlying demand component to it as well”.

Michele Bullock, RBA Governor

Bullock reiterated that while central banks typically “look through” supply shocks, it was a different story when it came to demand, stating “that is something central banks can do something about”.

Wages Warning

Wages and productivity growth were also called out, with the Governor sounding the alarm over the unsustainable rate of wages growth in Australia without a corresponding increase in productivity.

Wages growth hit a 14-year high of 4% in the September quarter as employees and low-paid workers across various sectors received large pay rises, due to decisions made by the Fair Work Commission.


Westpac Leading Index for October Dips

The Westpac Melbourne Institute’s Leading Index which forecasts the likely pace of economic activity has revealed another sub-zero reading on the growth rate, dipping to -0.4% in October, from -0.38% in September.

While the growth rate has improved from a reading of -0.7% in March, it still underscores the prevailing sluggishness of the economic environment.

Sufficiently Restrictive – FOMC Minutes

Minutes released from the Federal Reserve reveal that the FOMC is confident in the “strength and resilience” of the U.S. banking system and the economy more broadly.

It was noted that despite inflation remaining elevated and “unacceptably high”, supply and demand within the labour market was returning to equilibrium, and that monetary policy was putting downward pressure on economic activity.

While there was discussion on a rise in delinquencies relating to auto loans and credit cards within low-to-moderate income households, overall, the committee participants believed household balance sheets were robust, reflected in the latest consumer spending data.

Sohn Hearts and Minds – Bullish on Bonds

Some of the world’s leading investment managers converged on Sydney Opera House this week for the Sohn Hearts and Minds conference and as per usual, there were many divergent views on the outlook for financial markets.

From the insolvency risk lurking in private markets to the narrow opportunity set in global equities, many concerns were raised over the growth outlook due to the litany of challenges facing investors.

Unsurprisingly, the attractiveness of both cash and corporate debt were raised, and as Dan Loeb of US $18 billion fund manager Third Point Capital said, “the credit environment is one of the best that I’ve seen.”

Final Thoughts

Despite Australian inflation experiencing a material decline from 7.8%, it remains elevated and is in fact the highest among all major advanced economies.

As such, while hawkish calls emanating from the RBA are likely to persist in the near-term, we expect to see the dominant narrative of fighting inflation gradually be replaced by the need to stabilise economic growth.

Week Ahead 

  • Eurozone inflation
  • U.S. PCE and PMI data
  • German consumer confidence
  • Australian CPI indicator

*Data accurate as at 23.11.2023 

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