ABE Weekly 17/03/2021

Market Update  

 

If your dreams don’t scare you, they are too small”. – Richard Branson 

 

On the home front the news just keeps getting better. The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 2.6% to 111.8 in March from 109.1 in February. The Index is now just 0.2 points below the December level which was a ten-year high. The main factors driving the Index are improving economic conditions and prospects, both domestically and abroad, particularly as they relate to our labour market. 

Westpac now expect the Australian economy will expand by 4.5% in 2021, upgraded from 4.0% previously. This includes expectations for consumer spending to increase by a brisk 5.8% over the year, directly contributing a sizeable 3.1ppts to overall activity. 

Some good news for homeowners, the Westpac-Melbourne Institute House Price Expectations Index increased a further 3.1% in March to a new seven-year high. The Index is 12.5% above its pre-pandemic level. The Index is a better lead indicator of the confidence of investors, whose presence in the early stages of the current housing boom has been overshadowed by owner occupiers. 

On the interest rate front, any suggestion of rate increases will depend critically on “sustainably higher rates of wages growth” which would require a tight labour market for an extended period. The point being that it’s unlikely we will see tight labour market conditions for some time and hence the low or zero interest rate environment will continue for now. 

The reality is that central banks around the world face the same situation. Despite the very generous stimulus measures in the US, the US economy is also unlikely to see wages growth, let alone the sustained period of inflation above target necessary to begin making up for a decade of underperformance. Europe and the ECB are further behind still, with the ECB’s latest inflation projection for 2023 only 1.4%, nowhere near their target of 2.0%yr. 

With little change in the outlook for interest rates both domestically and abroad, the search for higher yielding securities continuesThat said, The Australian Bond Exchange is continuing to source high yielding corporate bonds of between 4-5% which is certainly more attractive than trillions in Term Deposits at .40%. 

Below is a chart of the 3-year Australian Government Bond that illustrates the extent of yield compression we have seen in just the last 12 months. The current RBA target for the 3-year bond is 10bps.