Australian Bond Exchange Weekly Update
Friday 8th December
Key points
- RBA holds rates steady at 4.35%pa
- Australian quarterly GDP growth comes in weaker than expected
- Is the U.S. economy finally turning?
- Moody’s downgrades China outlook
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to October is 4.9%.
- The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate in the year to October is 3.2%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 4.6% in the year to October.
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.9% in the year to September.
RBA Holds Rates Steady at 4.35%pa
The RBA held the official cash rate steady at 4.35%pa this week, opting for a ‘wait and see’ approach following last week’s cooler than expected Consumer Price Index Indicator data.
Since May 2022, the RBA has hiked rates 13 times to combat soaring inflation which despite remaining elevated, has come down significantly from a peak of 7.8% in December 2022.
As we look ahead to 2024, the key question is how long will rates stay on hold for?
While central bankers continue to talk tough on further rate rises, markets are seemingly taking a different view. The yield on the 10 Year Australian Government bond has dropped from 5% to 4.2% since November and the 5 Year has dropped from 4.6% to 3.9%.
Soft Landing
While some economists are saying the Australian economy is undergoing a soft landing, if something unexpectedly breaks, as has happened more than once at the end of an interest rate hiking cycle, then rates could be cut aggressively and quickly.
If such a scenario were to eventuate, this could spell trouble for investors relying on returns being generated from cash and short-term money markets.
Is 13 the ‘Lucky’ Number?
In Chinese numerology, the number 13 is auspicious and signifies assured growth and vibrancy while in many Western cultures, it’s often associated with bad luck.
Whether we see the RBA hike for a 14th time at its next meeting in February or not, it’s becoming increasingly clear that central banks across the globe are nearing the end of their tightening regimes.
While the story in Australia is a little different, especially given monetary policy has been less restrictive relative to the U.S., UK and elsewhere, inflation is still undoubtedly receding and GDP growth faltering.
Australian Quarterly GDP Growth Comes in Weaker Than Expected
The Australian economy grew by a meagre 0.2% in the September quarter, falling short of a an expected 0.4%, further signalling that the RBA’s monetary policy is working effectively to slow the economy.
Australian households are under mounting pressure with real disposable income declining 1.3% for the quarter, marking the lowest level in eight years. It was also the eight consecutive quarterly decline, falling 6.6% per capita over the past year.
According to KPMG’s Chief Economist, the only thing propping up the Australian economy is record net overseas migration. Similar comments were echoed by Westpac Senior Economist Andrew Hanlan
“Intense headwinds of high inflation, sharply higher interest [rates] and additional tax obligations are having a significant impact, leading to a sharp decline in real household disposable income”.
Andrew Hanlan, Westpac Senior Economist
Is the U.S. Economy Finally Turning?
Factory orders in the U.S. came in weaker for October with a -3.6% reading vs -2.8% expected. Orders for durable goods fell 5.4% while orders for transportation equipment crumbled, slumping by 14.7%.
It marks the biggest monthly decline since April 2020 and indicates that the manufacturing sector could be starting to slow materially.
While the services sector expanded in November, for the 11th consecutive month, U.S. job openings pulled back to its lowest level since the beginning of 2021.
A softening labour market is what the Federal Reserve is hoping to see and is indicative that its monetary tightening is working to cool what is still a very resilient economy.
Moody’s Downgrades China Outlook
The Chinese debt outlook has been downgraded by Moody’s with the ratings agency expressing concern over its debt-laden economy, especially as the real-estate sector has weakened substantially.
While China still retains its A1 credit rating which is deemed to be investment grade and low risk, the revised outlook does signify that there could be risks ahead.
Various state-owned-enterprises and other large property developers have been earmarked for government financial support as the economy undergoes a slowdown.
Moody’s announcement closely follows last month’s negative outlook revision for the U.S., where not entirely dissimilar concerns have been raised about unsustainable debt levels.
Final Thoughts
With Australian Government Bond yields continuing to slide lower, the relative attractiveness of corporate bonds and other fixed-income securities has undeniably increased.
Whether we start to see rate cuts in late 2024 or not, now could be an opportune time to rebalance and reposition portfolios as we head into the new year.
From leading U.S. department store Macy’s Inc. to Japanese tech conglomerate Rakuten and British banking giant, Barclays PLC, we have various investment opportunities available which are currency-hedged and provide exposure to some of the world’s most reputable companies and institutions.
Week Ahead
- U.S. inflation data, retail sales, PPI and Fed interest rate decision
- UK GDP data, unemployment, and BoE interest rate decision
- ECB interest rate decision
- Australian consumer and business confidence data
- German economic sentiment data
*Data accurate as at 8.12.2023
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