Australian Bond Exchange Weekly Newsletter
9 September 2022
“Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.” — Carlos Slim Helu
Key Points
- Reserve bank increases cash rate by 50bps
- AUD bond market snapshot
- Current account surplus
- Global update, US & China
Australia
Economic update
The Reserve Bank has increased the cash target to 2.35% following Tuesday’s meeting. The increase was in line with the expectations of most economists and is a further step in the normalisation of monetary conditions in Australia.
- The Board increased the cash target by 50bps, to 2.35% and increased the interest rate on ES balances by 50bps, to 2.25%.
- The RBA expects inflation in Australia to increase further over the months ahead, forecast for CPI inflation is 7.75% over 2022. Inflation is then expected to slow, forecasting 4% over 2023 and 3% over 2024.
- The RBA sees a pickup in wage growth and will continue to pay close attention to the evolution of labour costs and price-setting behaviour of firms in the period ahead.
- The full effects of higher interest rates are yet to be felt in mortgage payments.
- People are finding jobs, gaining more hours of work and receiving higher wages.
- The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
Bond market. The AU 10-30yr bond curve has traded a 10bp to 40bp range over the past three months, reaching all-time lows in June as markets recalibrated sentiment in the long end in the wake of the RBA’s tightening cycle and hawkish rhetoric out of the US Fed. At the same time, 10yr bond yields were rising to their highest levels since the RBA began its tightening cycle in May – Westpac
Current account surplus. Australia recorded its 13th consecutive current account surplus in the June 2022 quarter, the longest period on record.
- Balance of good and services increased to $16.3b, driven by strong export prices.
- Exports of goods and services increased 14.7 per cent as global supply constraints increased demand for Australian commodities.
- Trade services contributed to the rise in exports as education related and personal travel continued to recover following the reopening of Australia’s international borders.
- Imports of goods and services increased 4.6 percent as travel resumes.
Global
Powell’s Jackson Hole remarks will continue to impact markets. It was a decisive stand against inflation with Powell saying the Federal Reserve won’t stop raising interest rates until the economy is under control. The full effect of policy tightening is yet to be felt with Powell’s views and those of other FOMC members desire to complete the tightening cycle by year end.
China. Chinese authorities have extended COVID-19 lockdowns of Chengdu and Shenzhen for a second time, despite promises of freedom for tens of millions of people in the southern megacities following mass testing campaigns.
More than 70 cities are in partial or full lockdown, since late August, fuelling anxieties that restrictions initially planned for days could extend for weeks or longer as occurred in Shanghai this year.
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