Australian Bond Exchange Weekly Update
Friday 27th October
Key Points
- Australia’s inflation rate accelerated in the September quarter
- Michelle Bullock speaks
- Westpac Chief Economist tips interest rates to fall in 2024
- Preliminary Flash PMI – Australian business activity weakens
- Future Fund made $60 billion in portfolio adjustments during 2023
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate remains unchanged at 4.1%pa and the annual inflation rate in the year to September is 5.4%.
- The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate in the year to September is 3.7%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 6.7% in the year to September.
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 4.3% in the year to September.
Australia’s Inflation Rate Accelerated in the September Quarter
Higher fuel prices, energy and rents have pushed up Australia’s quarterly inflation rate, with the headline CPI increasing 1.2% compared to the previous quarter, exceeding a forecasted 1.1%.
Annual headline inflation was 5.4% compared to 6% in the June quarter, and was substantially lower than 7.8% in the December quarter.
The higher-than-expected reading adds further concerns that the RBA could hike rates again in November, although RBA Governor Michele Bullock has not confirmed whether the data will trigger a “material change” to the inflation outlook or further rate hikes.
“I’m not prepared to say yet whether or not it’s a material change to our forecasts …We have to look at whether or not it’s material enough to change our views on policy”.
Michelle Bullock, RBA Governor
Michelle Bullock Speaks
RBA meeting minutes reveal that the new Governor will take a strong stance in the fight against inflation, stating the Bank “will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”.
Whether the latest inflation figures are substantial enough for the RBA to consider another hike, Bullock also stressed that “if a supply shock is transitory and modest, monetary policy should mostly look through it”.
Westpac Chief Economist Predicts November Hike but Tips Rates to Fall in 2024
Westpac’s new Chief Economist, Luci Ellis, believes ‘she has seen enough’ to make her first-rate call prediction, believing the RBA will hike in November following hotter than expected inflation data.
Ellis also believes that rates will likely start to decline in 2024 which might seem contrarian to many, but as a revered economist and former Assistant Governor at the RBA, her forecasts undeniably carry weight.
Preliminary Flash PMI – Australian Business Activity Weakens
Business activity in October was softer with preliminary data from the Flash Services PMI Business Activity Index hitting 47.6, down from 51.8 in September. Manufacturing output was also lower, with both the PMI Output Index and Manufacturing PMI decreasing.
The fall in business activity is largely attributable to a weak demand climate, inflationary pressures and higher interest rates.
Australia’s Future Fund Made $60 Billion in Portfolio Adjustments in 2023
In its latest annual report, it was revealed that the sovereign wealth fund made over $60 billion worth of changes across its portfolio during the 2022–23 financial year, positioning for a more complex and volatile environment.
The report states that the Fund is expecting forward-looking returns will be more difficult to earn and that investors needed to ‘refresh investment approaches to achieve desired investment purposes’.
While the Future Fund’s portfolio is weighted towards alternatives (17%), developed market global equities (15.95%), and private equity (16.5%), the Fund recently made headlines when it announced it was doubling its exposure to domestic corporate debt, stating the returns on offer had hit their highest level in 15 years.
“Where it’s trading now at a 7 to 9 per cent yield is the highest it has been since the financial crisis, and you certainly cannot say that for equities. So on a risk-adjusted basis we think that’s attractive and has created an opportunity.”
Raphael Arndt, Chief Executive Officer, Future Fund
Final Thoughts
While both equity and fixed-income markets continue to experience heightened volatility, we retain the view that corporate fixed-income securities sit in the sweet spot, providing an attractive and reliable income stream while also offering capital stability.
Last week we announced our latest exclusive market-linked security for leading U.S. department store and retailer, Macy’s Inc, offering a 7.25%pa return paid quarterly over a 4-year term.
For more information or to reserve an allocation, click the link below or contact an adviser today.
Week Ahead
- Federal Reserve and Bank of England interest rate decisions
- U.S. unemployment figures, services PMI and non-farm payrolls
- Australian retail sales
- Australian Manufacturing PMI
- European GDP and inflation
*Data accurate as at 13.10.2023
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