Australian Bond Exchange Weekly Update
14th June 2024
Key points
- U.S. inflation eases, Federal Reserve holds
- In the doldrums – Australian business conditions slide lower
- Private credit booms
- Chinese inflation slows
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 35%pa and the annual inflation rate in the year to May is 3.6%.
- The US cash rate (policy rate) is currently between 25%-5.5%pa and the annual inflation rate in the year to May is 3.3%.
- The Bank of England Bank Rate currently sits at 25%pa to fight an inflation rate of 2.3% in the year to April.
- The European Central Bank Cash Rate (deposit facility) is 00%pa, to fight an annual inflation rate of 2.4% in the year to April.
U.S. Inflation Eases, Federal Reserve Holds
U.S. inflation was flat in May, sending the annual rate lower to 3.3%, down from 3.4% in the month prior.
The result beat analyst forecasts and is seen to be constructive for rate cuts this year, but it wasn’t enough to jolt the Federal Reserve into action, with the central bank opting to keep the federal funds rate steady between 5.25% and 5.5%.pa.
Inflation in the U.S. has eased significantly from its peak of 9.1% in June 2022, but has seen little progress this year, while also remaining above the Federal Reserve’s 2% target.
“We do see today’s [inflation] report as progress and as building confidence, but we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”
Jerome Powell, Federal Reserve Chairman
The Federal Reserve now expects just 1 rate cut for 2024 but predicts four cuts will be needed in 2025.
In the Doldrums – Australian Business Conditions Slide Lower
Data released by NAB saw both business conditions and confidence fall in May, underscoring weaker operating conditions.
The results reflect the state of the economy with last week’s GDP data revealing the Australian economy grow by an anaemic 0.1% in the March quarter.
While positive sentiment and optimism is clearly fading, it should be stated that both indices are falling from elevated levels and remain largely in neutral territory.
Additionally, corporate earnings in Australia have so far remained resilient, with many of the nation’s biggest companies posting strong returns.
Whether earnings start to come under significant pressure or not, our view is that corporate fixed-income is in prime position to deliver stable and consistent risk-adjusted returns to investors.
We believe this for several reasons; not only do corporate bonds and other fixed-income securities offer greater certainty when compared to equities, they also exhibit less volatility, and can also offer investors with downside protection.
Read our guide on the benefits of bonds
Private Credit Booms
Similarly, there’s been an explosion of interest in private credit as investors seek to diversify their portfolios and tap into asset classes which are directly benefiting from higher interest rates.
We see this development as positive and yet another endorsement of the important role which the fixed-income asset class is playing.
For those looking to obtain portfolio exposure to private credit, we have several available fixed-income investment opportunities which can facilitate this.
Chinese Inflation Slows
China’s consumer price growth was weaker than expected in May, increasing by 0.3% and beating analyst expectations of 0.4%.
The reading follows a 0.3% increase during the moth of April and is fuelling optimism that China’s bout of deflation is over.
China has been plagued with weak consumer consumption as the world’s second-largest economy grapples with a still unfolding property crisis and high unemployment.
The trajectory of China’s economy is significant, not only because Australia’s prosperity is largely dependent on it as a trading partner, but because Chinese growth is expected to drive most of global GDP in the future.
Source: Bloomberg
Week Ahead
- RBA interest rate decision
- S. retail sales
- UK inflation rate
- Bank of England interest rate decision
*Data accurate as at 14.06.2024
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