14 October 2022
Key Points
- The Westpac Melbourne Institute Index of Consumer Sentiment
- BOE to end bond-buying programme
- Current investment opportunities
Australia
The Westpac Melbourne Institute Index of Consumer Sentiment fell by 0.9% from 84.4 in September to 83.7 in October. The fall in consumer sentiment comes after the surge in the cost of living, rising interest rates and concerns about the economic outlook.
The results could have been significantly worse if the Reserve Bank had increased the cash rate by 50bps instead of the 25bp it delivered in the October Board meeting.
The surprise slowdown in tightening by the RBA had little impact on consumer expectations for further rate hikes, partly due to households conditioned by markets and the media to expect further increases. Amongst those surveyed after the RBA decision, 54% expect rates to increase by 1ppt.
There was a surprising deterioration in the outlook for the labour market. The Westpac-Melbourne Institute Unemployment Expectations Index increased by 11.7% from 99.6 to 111.3 (a higher index means more consumers expect unemployment to rise in the year ahead). Although, it is too early to call a sustained deterioration in confidence in the labour market.
The housing market remains lacklustre, with the ‘time to buy a dwelling’ index falling by 6.4% to 75.4. Since March this year, the index has been in the 75-80 range. The fall this month has taken it to the lower end of the range and 43% below the most recent peak in November 2020.
The goal of the Reserve Bank is to slow down demand as spending is still strong. Slow demand for labour and slow pricing activities by businesses but there are delays in passing on the interest rate increases. The rate hikes in May, June and July may have been passed.
Global
The cost of government borrowing has continued to soar after the Bank of England insisted it would end its emergency bond-buying programme on Friday as planned, ruling out claims the bank would extend the programme beyond Friday’s deadline.
The bond selloff sent yields soaring, thereby increasing the cost of government borrowing. The price of 20-year UK bonds hit new lows on Wednesday, sending their yields to levels last seen in June 2002 – which jumped by 27 basis points to 5.19%.
The Bank’s emergency package was introduced to avoid a potential collapse of the UK pensions sector and a lenders’ strike in the UK housing market.
Current Investment Opportunities
This docile bond market of the past 20+ years is gone. Now is the time to capitalise on higher yields and start to accumulate in a misunderstood and underappreciated local asset class. Big super and our sovereign wealth funds are quickly increasing their bond allocations, investors should be seriously considering this also.
Contact us to find out more details.
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