ABE Weekly: Macquarie Backs Bonds as Equities Lose Appeal

Australian Bond Exchange Weekly Update

Friday 6th June 2023

Key Points

New Australian CPI data shows inflation is still pernicious, driven by rising rents and lack of housing, prompting some analysts to predict another cash rate hike as early as next week.

SIAA Conference insights suggest investors are moving away from highly volatile investments like equities, to focus on investments with stable, guaranteed returns.
Australians starting to feel the pinch of the rate rises, as hardship agreements increase and mortgage holders reallocate funds from offset accounts to cover the cost of living.
In an Australian-first, ABE completed a near-real time corporate bond settlement using Central bank Digital Currency (CBDC) as part of the RBA’s ‘eAUD’ Pilot Program.

Global Cash Rates & Inflation*

The Reserve Bank of Australia (RBA) cash rate is at 3.85%, with annual inflation at 7%. Next Tuesday 6th June at 2.30pm the RBA will make their next cash rate decision.

The Bank of England (BOE) cash rate is 4.5%, as the UK central bank chases an inflation rate of 8.7%. The next cash rate decision will be on Thursday 22nd June.
The US cash rate is sitting between 5 and 5.25% and inflation for the twelve months leading to April is 4.9%. The next decision will be made on Wednesday 14th June.
The European Central Bank (ECB) cash rate (main deposit rate) is 3.25% and inflation dropped to 6.1% in May. The next cash rate decision is on Thursday 15th June.

Monthly CPI Data spurs predictions of a rate rise as early as next Tuesday

This week, the Reserve Bank of Australia (RBA) Governor Philip Lowe met with the Senate Economics Legislation Committee for Budget Estimates, where he stressed the 2023/2024 Federal Budget was “broadly neutral” in relation to its impact on inflation, and that higher interest rates were starting to have the desired effect.

However, the monthly CPI data released during this meeting saw inflation jump from 6.3% in the year to March to 6.8% in the year to April. This jump in inflation was not taken lightly, spurring predictions that the RBA may need to increase the cash rate as early as next week.

This comes as economy battles with a cost-of-living crisis, and a lack of housing exacerbated by a significant slowdown in the annual pace of building approvals – down 24.1% over the year to April. Despite Retail Trade data released last Friday confirming consumer spending is slowing, this tight housing market and rising rents are still the primary inflation drivers.

Asked at the hearing by Senator Nick McKim if higher interest rates were causing rising rents, Lowe replied “The solution isn’t lower interest rates. The solution is supply, supply, supply.”

Macquarie backs bonds, as the net-risk reward for equities is “not particularly great”

ABE Co-Founder Markus Mueller attended the SIAA Conference this week, and after hearing from the industry he claimed, “The message is clear, bonds are back! Even stockbrokers are looking to invest in fixed income.”

Speaking to Ausbiz, Macquarie’s Head of Wealth Management Investment Strategy, Jason Todd agreed. “We think yields are at their most attractive levels.”

“What you’re getting now if you’re thinking about buying bonds” he continued, “is a very appealing yield, but also capital protection against a growth slowdown.”

Though investors still need to consider whether they’ll wear the risk of taking money out of high bearing savings accounts to put in bonds. According to Todd, the current net risk-reward for equities is “not particularly great” as investors factor in a looming economic slowdown.

The ASX also shared insights from their 2023 Australian Investor Study, which saw 67% of investors prefer stable or guaranteed returns. With $1.2m new investors since 2020, this data supports recent commentary suggesting that investors are flocking to the fixed income market, thanks to higher-than-average yields.

Source: SIAA Conference 30th May 2023

As equity markets are highly volatile and heavily influenced by how the market “feels” (investor sentiment), the value of equities is always fluctuating. This was seen on Wednesday, when the ASX dropped 1.2% in response to the rise in inflation.

Australians starting to feel the pinch of the rate rises, as hardship agreements increase

The lack of supply in the housing market is exacerbated by the high levels of migration, and an increase in households due to smaller household sizes. According to RBA data included in ANZ’s Housing affordability report published on Monday, an additional 120,000 households were added to the mix in 2020-2021.

The trend toward smaller household sizes, coupled with skyrocketing rents and mortgage rate rises and complicated further by an acceleration in migration levels, has seen Australians feel the pinch. Commonwealth Bank data has shown an uptick in hardship agreements, and a drop in the value of offset accounts, as Aussies reallocate funds to afford the new cost of living.

As some unions fight for a 7% increase to match inflation, some commentators fear that a wage price spiral could occur, especially as employees demand wage increases to combat the cost of living crisis. A wage price spiral is a self-reinforcing cycle, where rising wages increase prices, driving inflation, which then drives wages and so the cycle continues.

With the Fair Work Commission Annual Wage Review streaming live at 10am today, the results of this review, weak productivity growth, a tight housing market, historically low unemployment levels and persistent inflation, are likely to be key factors in the RBA’s rate decision on Tuesday.

Goodbye T+2; Real-time bond settlements closer than you think

In an Australian first, ABE has settled Central Bank Digital Currency (CBDC) bond trades in near real-time. Selected as one of just 15 use cases in the Reserve Bank of Australia & Digital Finance CRC ‘eAUD’ Pilot Program, this marks a significant milestone in the digital transformation of Australian finance.

Real time CBDC corporate bond settlements using ABE’s technology will remove the need for the T+2 settlement timing. Financial institutions would no longer need to worry about contra settlements, or the infection of failed settlements with other trades.

Watch the interview with our CEO Bradley McCosker on Ausbiz here.

What’s coming up:

Today, at 10am, the Fair Work Commission will make their decision on whether to increase award wages at the Annual Wage Review.

At 11.30am today, the Lending Indicators data will be released by the ABS here. The RBA uses this data to monitor trends in the credit market, which informs monetary policy.
Next Tuesday 6th June, the RBA will decide whether to increase the cash rate or keep it at 3.85% for another month. They’ll release the announcement at 2.30pm here.

*Data accurate as at 2.6.2023

Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.