20th March 2019
The yield compression story continued this week and we saw the Australian 3-year Government bonds trading below the cash rate! While that may be partially due to lower market liquidity on the back of future rolls it still surprised us how negative currently the sentiment is in the Government bond market. We were also surprised with the lack of bond trading liquidity in the market and our wholesale traders had to go off shore for some larger tickets to find the required Government bonds.
One of the main negative concern is Australia’s property market which enjoyed a stellar run for many years. This has come at a cost, with Australia having one of the highest levels of household debt in the world. RBA figures show than two thirds of the country’s net household wealth are allocated into real estate. With house prices falling since October there is wide spread concern how the economy will handle it.
As we all know by now, China has a very significant impact on Australia and our growth path. While we believe, the US will eventually find a way to settle the trade dispute with China, the uncertainty however has caused growth to slow. The Chinese in turn has over the past couple of months kept up the fiscal and monetary stimulus to prevent growth from slowing too much but it has less of an impact than it used to, purely off the larger size of China’s economy.
The US Fed has their meeting this week, with a near hundred percent consensus they will keep rates unchanged the market is more interested to see the path it will take for the rest of the year. With all the geopolitical risk going on we believe it would be fool-hearty to increase rates any time soon.
Another week of Brexit drama! Last week, lawmakers narrowly voted to remove the option of a no-deal Brexit. This vote, however, is non-binding on the government, nevertheless, it’s clear that most MPs do not want a hard Brexit. On the European side, all 27 members of the EU must agree to an extension, which I am sure they will do. The financial markets did not take this drama as too important, with the English Pound strengthen somewhat and the bond markets were focused more on the global picture.
On the economic release front the focus was on inflation data with the Eurozone, CPI coming in at 1.5% and Core CPI gained 1.0%, as both readings matched their estimates. This is still well below the ECB target of around 2% and should add to the argument for further easing of monetary and maybe more importantly fiscal stimulus throughout Europe.