Australian Bond Exchange

ABX weekly 27/03/2019

Market Update  

The U.S. posted its biggest monthly budget deficit on record last month, thanks in part to the combination of falling corporate and individual tax revenue and increasing federal spending. 

Following on from our inverted yield curve comment last week The US curve has also inverted in the 3 months against the US 10s. This is a signal of looming financial collapse and the US is hurtling towards a recession with a financial apocalypse on its way.  An inversion followed by two or more quarters of negative economic growth is the most telling sign of an impending US recession.  An inverted yield curve means it’s harder for institutions to lend profitably, which causes a credit squeeze. It is a sign of overly restrictive policies occurring at the same time as economic growth slowing.  A recession in the US was likely to have global consequences as America still had the world’s biggest economy and that the impact on Australia would depend on government decisions.  

The flow-on effect has the RBA seriously considering QE (quantitative easing) but with already low interest rates the impact of a further rate cut is diminished. A likely outcome would be for the RBA to stimulate the economy through the currency bringing the AUD down and keep Australia attractive to the world. As interest rate cuts are not out of the question, I would be very long bonds and lock in those yields while you can. 


European Desk 

Chinese President Xi Jinping has brought this week lots of deals to Europe. Italy has become the first Group of Seven Nations to join the Belt and Road Initiative (BRI) which caused some nervousness amongst Italy’s European partners. On Mr Xi’s next stop in Paris, he continued to bring multi-billion gifts in form of more deals such as an order of 300 Airbus airplanes.  On some other news, the much watch composite Eurozone Manufacturing PMI reading slipped from 49.4 in February to 47.7 in March.  The weakness in the manufacturing sector is now in its deepest downturn since 2013 which is part of the explanation why most European government bonds are slipping back into negative rates.