Australian Bond Exchange Weekly Update
26th July 2024
Key points
- China cuts short-term policy rate to boost economy
- Bank of Canada slashes key rate again
- Eurozone weakness persists
- ASIC to scrutinise private credit
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 May is 4.0%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to June is 3.0%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 2.0% in the year to June
- The European Central Bank Cash Rate (deposit facility) is 3.75%pa, to fight an annual inflation rate of 2.5% in the year to June.
China Cuts Short-term Policy Rate
The People’s Bank of China has cut its seven-day reverse repo rate by 10 bps to 1.7%pa in a bid to increase financial support for its flailing economy.
Commercial banks have since cut their own lending rates, making it cheaper for Chinese consumers and businesses to borrow funds.
China has been grappling with a real estate market meltdown and has been enduring a long streak of deflation with prices dropping for five consecutive quarters.
Bank of Canada Slashes Key Rate Again
The Bank of Canada cut its official interest rate for the second consecutive month by 25 bps to 4.5%pa per annum with rate setters stating “there was clear consensus” for further easing.
Canadian GDP growth has been anaemic for the last few years and the Bank said it is now more attuned to striking the right balance between the risk of higher-than-expected inflation with risk of a weaker-than-expected economy.
The Bank also said that further rate cuts are possible in the months ahead, providing further evidence that rates could start to come down rapidly in certain jurisdictions.
Eurozone Weakness Persists
German manufacturing output slumped in June with the composite PMI index dropping below 50, suggesting that an economic recovery is still a way off.
There’s a litany of challenges facing Germany and Europe more broadly including labour shortages, high energy costs, political uncertainty, and a raging war in Eastern Europe.
European GDP growth expanded by 0.3% in the first quarter of 2024 but has remained sluggish for some time.
While the European Central Bank held rates steady this month after cutting in June, inflation has moderated substantially, potentially setting the scene for additional cuts later in the year.
ASIC to Scrutinise Private Credit
Private credit has rapidly emerged as a highly sought-after asset class; however the sometimes-opaque nature of available offerings has prompted greater scrutiny from ASIC.
Key concerns for ASIC include the inherent lack of transparency in private markets, both regarding fees and the quality of the loans offered, and whether valuations realistically reflected the often-illiquid nature of the underlying assets.
The Australian private credit asset class has grown at a compound annual growth rate (CAGR) of 23% since 2015, growing from $50 billion in funds under management to $200 billion in 2023.
The high returns on offer are understandably luring in investors, but the risks are something which haven’t necessarily been well covered or understood.
Final Thoughts
As we mentioned last week, the global trend of rate cuts is gaining momentum, with China and Canada the latest major economies to do so.
The Federal Reserve (along with the Bank of England) is up next, and while markets are pricing in several cuts this year, the latest Reuters poll suggests that the Fed will hold again on July 31.
This is despite both growing domestic political pressure, and Chairman Powell recently stating that the Bank wouldn’t necessarily wait until inflation reached its 2% target to cut.
The Australian Bond Exchange has been experiencing strong client demand and our latest securities issue for Xerox Corporation with a 7.86%pa coupon was significantly oversubscribed and is no longer available.
We are currently taking expressions of interest for a second tranche, however there will likely only be limited availability.
For those interested in an allocation, please reply to this email or speak to your advisor today.
Week Ahead
- Federal Reserve interest rate decision
- Australian inflation data
- Euro Area GDP growth
- Bank of England interest rate decision
*Data accurate as at 26.07.2024
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