Australian Bond Exchange

ABE Weekly: Prospect of Further Rate Hikes Growing

Australian Bond Exchange Weekly Update

28th June 2024  

Key points

  • Wrong direction – Australia’s inflation challenge
  • Construction pain as building costs surge
  • Aussie consumers are becoming less pessimistic

Global Cash Rates & Inflation 

Wrong Direction – Australia’s Inflation Challenge

The monthly CPI indicator released this week reveals that Australian inflation is moving in the wrong direction.

The annual rate of inflation increased to 4% in May, up from 3.6% in April and is now beginning to erode gains made in 2023.

While we’ve seen rate cuts eventuate in Europe and Canada, the likelihood of any easing in Australia in 2024 is diminishing rapidly as a higher for longer environment prevails.

The Reserve Bank of Australia will undoubtedly be watching closely, especially as additional fiscal stimulus measures and tax cuts are set to kick in from July 1st.

Overall, this environment continues to bode well for fixed-income investments where risk-adjusted returns remain attractive.

Construction Pain As Building Costs Surge

Data released from the Australian Bureau of Statistics shows that construction costs have surged 37% over 4 years, further stoking fears that inflation is becoming entrenched.

Building and material costs initially surged due to pandemic-era supply chain disruptions, and while materials have largely eased since then, massive infrastructure spending is adding upward pressure to the sector.

This comes as insolvency rates have increased by 41.1% in the March quarter vs the same period in 2023 while early stage mortgage arrears is up 30% over the March quarter compared to 2 years ago.

Notably, sole traders within the construction sector are 60% more likely to be in early mortgage arrears vs the average consumer.

Aussie Consumers Are Becoming Less Pessimistic

Data released from the Westpac-Melbourne Institute shows that Australian consumers are somewhat less pessimistic than last month, with the Consumer Sentiment Index increasing by 1.7% to 83.6 in June, up from 82.2.

It’s worth noting that the Index is still deep in negative territory and fears over inflation, interest rates and economic growth continue to weigh deeply on sentiment. The report notes that over half of consumers surveyed expect mortgage rates to increase over the next 12 months.

In Case You Missed It

Earlier this week we sat down with Blair Dewhurst, Senior Investment Adviser at the Australian Bond Exchange, who shared his outlook on the trajectory of interest rates, inflation and the economy more broadly. From market turmoil in France to rate cuts in the Northern hemisphere, Blair touched on a range of pertinent topics and shared his thinking on why corporate bonds are well placed in the current macro-economic environment.

Week Ahead

  • UK general election
  • Federal Reserve Chairman Powell speech
  • RBA meeting minutes
  • U.S. jobs data
  • U.S. unemployment

*Data accurate as at 28.06.2024

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