Australian Bond Exchange Weekly Update
Friday 23 February
Key points
- Introducing ABE’s latest investment offering – Hertz Corporation
- Economic uncertainty remains high – RBA meeting minutes
- China slashes key mortgage rate to support slumping real estate values
- A deflationary spiral
- Global commercial property is in trouble
- Equities ascend as economic expectations decline.
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 December is 4.1%
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa, and the annual inflation rate in the year to December is 3.1%
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 4.0% in the year to January
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.8% in the year to January.
Introducing ABE’s Latest Investment Offering – Hertz Corporation
Earlier this week, ABE launched its latest market-linked note for the Hertz Corporation with an attractive 7-7.5%pa return, quarterly coupon payments, and a 4.5-year term with a maturity of 5 July 2028.
The Hertz Corporation is a global household name and is one of the largest worldwide vehicle rental companies with a market capitalisation of USD 2.7 billion. This positions the company well to ride the wave of travel normalisation post COVID-19, and the associated uplift in vehicle rentals it will likely bring.
For more information about this opportunity or to register your interest, speak to an ABE investment adviser today.
Economic Uncertainty Remains High – RBA Minutes
The latest meeting minutes released from the RBA reveal that the Bank considered raising the cash rate by 0.25% but opted to leave it unchanged due to economic uncertainty, slowing inflation and a weakening economy.
The minutes state that “the risk of inflation not returning to the Board’s target within a reasonable timeframe had eased”, and that “data on the labour market and consumer spending had also been weaker than previously expected.”
While the RBA still refuses to rule out an increase in rates, it seems content with the direction in which the economy and inflation are heading. As such, the next rate move is still expected to be a cut, although the timing is hotly debated.
This week, Westpac CEO Peter King stated he believes the RBA will cut within the next year while CBA’s Matt Comyn thinks a 2025 rate cut is more likely.
China Slashes Key Mortgage Rate to Support Slumping Real Estate Values
With Chinese property values continuing to slide lower, the People’s Bank of China has stepped in to alleviate some of the pressure, cutting its 5-year mortgage reference rate by 25bps to 3.95%pa.
The Chinese economy has been plagued with weak domestic demand and investor confidence which have been weighing materially on property values.
By some estimates, real house prices across China have declined 16% from their peak in 2021.
Additionally, as of the fourth quarter of 2023, Chinese housing starts and new home sales had declined 64% and 52% respectively from their peak in 2020.
A Deflationary Spiral
Weak demand has been pervasive and hasn’t been contained to the Chinese real estate sector, spilling into other segments of the economy.
In January, consumer prices fell at their fastest annual rate in 15 years, dropping 0.8% year-on-year in January for the fourth consecutive month.
Final Thoughts
While it’s important to remain cognisant of the risks that declining commercial property values and China’s deflation spiral pose to global markets, another acute and potentially more imminent danger is the seemingly runaway train that is equity markets.
As pointed out in a recent JPMorgan Chase & Co investment note, “the potential risks of a second inflation wave could jeopardise the current optimism in the capital markets.”
This divergence of market expectations and economic expectations is a salient point, and one that investors should remain aware of, especially when investing into riskier growth assets.
Week Ahead
- U.S. GDP growth
- Japanese inflation data
- U.S. Core PCE
- Australian monthly CPI Indicator
- Australian manufacturing PMIs.
*Data accurate as at 23.02.2024
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