Australian Bond Exchange Weekly Update
Friday 1st March
Key points
- Australian inflation steady at 3.4% in January
- Corporate earnings – what we’ve learned
- Demand for credit remains strong
- Commercial property woes persist
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at35%pa and the annual inflation rate in the year to January is 3.4%.
- The US cash rate (policy rate) is currently between 25%-5.5%, and the annual inflation rate in the year to January is 3.1%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 4.0% in the year to January
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 8% in the year to January.
Australian Inflation Steady at 3.4% in January
The monthly CPI indicator, which provides a measure of inflation and includes statistics about prices for categories of households expenditure, held steady at 3.4% for January, beating analyst expectations of a 3.6% increase.
While the Holiday and Travel (-7.1%) and Meat and Seafood (-2%) categories saw significant declines, these were partially offset by increases in Housing (+4.6%), Food and Non-alcoholic beverages (+4.4%), Alcohol and Tobacco (+6.7%) and Insurance and Financial Services (+8.2%).
The data is the latest indication that the inflation rate continues to ease in Australia. While this may provide further evidence to suggest the next interest rate move may be lower, the timing of any potential cut is still hotly contested.
It’s also important to consider the numerous domestic and international risks which could threaten the likelihood of rate cuts. These include the continuation of rapid house price growth, a slowing Chinese economy, and global conflicts in Europe and the Middle East.
Corporate Earnings – What We’ve Learned
In the face of economic uncertainty and a higher interest rate environment, Aussie corporates have demonstrated surprising earnings resilience overall.
While the near-term outlook suggests that we’re in for a period of earnings weakness, many companies beat market expectations, despite experiencing sagging profit.
This wasn’t the case for all companies however and we were pleased to see strong earnings from Flight Centre which has experienced a sixfold increase in net profit and is clearly benefiting from the post-COVID travel recovery.
The Australian Bond Exchange launched its Flight Centre Travel Group Ltd credit-linked-note in early 2023, and we are pleased to see the company continuing to go from strength to strength.
Demand For Bonds Remains Strong
Earlier this week Macquarie Group issued its largest ever Tier 2 bond issuance at a whopping $4.95bn for a 1.25bn issue.
The record-breaking amount is indicative of the insatiable appetite which investors currently have for bonds and credit, which are paying highly attractive risk-adjusted returns.
The issuance closely follows ANZ’s Tier 2 issuance in January, which was sized at $2.285 billion and attracted $4.1 billion of bids.
Australian Bond Exchange is pleased to have participated in both bond issuances for the benefit of our clients.
Commercial Property Woes Persist
While China’s faltering property sector is taking centre stage, stress is continuing to build in other markets, including Australia and the United States.
In Australia, CBD office vacancy rates have hit their highest levels since 1995, climbing to 14.8% nationally, and there’s been no shortage of negative headlines.
The latest MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index shows the unlisted office sector suffered a 10.6% decline in total return for the calendar year.
The report states that “overall annual results are the worst since the months immediately following the GFC” with “all funds recording a total return of -7.2%pa” which was “well off the positive 6.4%pa return recorded in the previous 12 months”.
In the U.S., bad commercial real estate loans have overtaken loss reserves at the biggest US banks after a sharp increase in late payments linked to offices, shopping centres and other properties.
Delinquencies at these banks have almost tripled to U.S. $9.3 billion in the past year and across the wider banking sector, the value of delinquent loans tied to offices, malls, apartments and other commercial properties more than doubled in 2023 to $US24.3 billion.
With financial stress continuing to build across the commercial real estate sector, it’s important for investors to remain aware of the contagion risks which could weigh on sentiment and trigger panic across investment markets.
Final Thoughts
Australian Inflation continues to show signs of moderation which is undeniably positive for rate cut hopes – but this is fuelling rampant investor speculation which is pushing asset price valuations higher.
Looking abroad, global conflicts and ongoing challenges in the commercial property sector in both China and the U.S. could also threaten to destabilise what has so far been an orderly disinflationary process.
As such, investors should carefully consider how their portfolios are positioned and maintain a degree of healthy scepticism.
Week Ahead
- Australia GDP Growth Ratte
- U.S. Services PMIs and Jobs data
- ECB interest rate decision
- China inflation rate
For more information on how corporate fixed-income can benefit investment portfolios in times of economic uncertainty, speak to an ABE adviser today.
*Data accurate as at 01.03.2024
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