Australian Bond Exchange Weekly Update
17th May 2024
Key points
- Federal Budget – the quick take
- Considerable uncertainty in the global economy
- Cash rate expected to ease from mid-2025
- Sighs of relief as U.S. inflation eases
- Australian business confidence slumps | wage prices down
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 April is 3.4%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to March is 3.4%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 3.2% in the year to March
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.4% in the year to April.
Federal Budget – The Quick Take
From rental assistance to energy rebates and the imminent stage three tax cuts, there is growing concern that the Federal Budget will reignite consumer spending.
Not only does this threaten to keep inflation elevated but it may also result in higher for longer interest rates and fewer rate cuts when they arrive, underscoring the relative attractiveness of fixed-income in the current environment.
Increased spending and support were also allocated to social housing, students with HELP debts, and the Government’s green energy ‘A Future Made in Australia’ growth agenda.
Despite these spending measures, Treasurer Jim Chalmers expects headline inflation to return to the RBA’s 2-3% target range by the end of 2024.
This stands in stark contrast to the RBA’s forecast where it expects inflation to return to target by 2025 and reach the midpoint of this range by 2026.
“We’re also conscious that the economy is not especially strong right now, and so there are some fine balances to strike”.
Dr Jim Chalmers, Federal Treasurer of Australia
On economic growth: The Government warns that there is “considerable uncertainty” in the global economy and the local economy is more sluggish that expected.
As such, December’s mid-year forecast of 2.25% real growth in GDP for 2024-25 has now been downgraded to 2% and from 2.5% to 2.25% the year after.
On interest rates: The Government expects the cash rate to gradually ease from around the middle of 2025 to reach 3.6%pa by the middle of 2026.
On employment: Labour market conditions are softening and are expected to ease further over 2024–25. The unemployment rate is expected to remain low by historical standards but rise gradually to 4.5% by the June quarter 2025.
Overall, the Government understandably needs to strike the right balance between fighting inflation and stimulating a slumping economy.
However, the risk is that much of the new spending will be injected into the economy too soon and at a time when fighting inflation remains the primary challenge.
Regardless of whichever narrative you subscribe to, it’s clear that interest rates are likely to remain higher in Australia for the remainder of 2024, while potentially starting to come down by the middle of 2025.
As such, fixed-income investors may want to consider whether their investment portfolios are appropriately positioned to take advantage of the attractive rates which are currently available.
Sighs Of Relief As U.S. Inflation Eases
Inflation in the United States increased less than expected for April, rising 0.3% after advancing 0.4% in both March and February. On an annual basis, the inflation rate fell from 3.5% in March to 3.4% in April.
The reading will have undoubtedly prompted countless sighs of relief and is a small step in the right direction, with inflation having accelerated in the first three months of 2024.
Bond yields fell on the basis of that news while both the S&P 500 and NASDAQ indices were propelled to new all-time highs, highlighting the continued exuberance bubbling away in risk assets.
Australian Business Confidence Slumps | Wage Prices Down
The latest business survey data released by National Australia Bank (NAB) reveals a weakening in business conditions with the index falling 2 points to 7 index points while the business confidence was steady at 1 point.
The survey also showed that employment also declined 5 points to 2 index points, while profitability was steady.
Separate data released from the Australian Bureau of Statistics reveals that wage prices eased slightly and may indicate that conditions are beginning to ease what is still a very tight labour market.
Final Thoughts
With inflation remaining elevated, rate cut expectations being pushed further out, and equity markets at eye-watering valuations, a higher for longer narrative positions fixed-income investors well.
This is especially true when considering that corporate bonds and other fixed-income securities are offering returns of 6-8%pa, with reduced portfolio volatility.
Week Ahead
- RBA meeting minutes
- Federal Reserve meeting minutes and chairman’s speech
- Australian consumer confidence
- UK inflation rate
*Data accurate as at 17.05.2024
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