Australian Bond Exchange Weekly Update
6th December 2024
Key points
- Turmoil in France
- A South Korean coup
- Aussie GDP disappoints
- Aussie property valuations slide lower
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 35%pa and the annual inflation rate in the year to September is 2.8%.
- The US cash rate (policy rate) is currently between 50%-4.75%pa and the annual inflation rate in the year to October is 2.6%.
- The Bank of England Bank Rate currently sits at 75%pa to fight an inflation rate of 2.3% in the year to October.
- The European Central Bank Cash Rate (deposit facility) is 25%pa, to fight an annual inflation rate of 2% in the year to October.
Turmoil in France
The French government collapsed earlier this week after opposition parties in parliament supported a vote of no confidence against Prime Minister Michel Barnier.
The move, which came in response to Barnier’s use of special powers to push through a social security budget on Monday, is just the latest sign of geo-political instability in Europe and elsewhere.
As a result, the credit spread between the 10-year French Government Bond and the 10-year German Bund has widened to its highest level since 2012, reflecting increased investor demand for higher returns to compensate for the risk of holding French sovereign debt.
A South Korean Coup
Political crisis also struck South Korea this week with President Yoon Suk Yeol declaring martial law – a decision which was swiftly reversed just hours after being announced due to backlash from legislators and the protestors.
The South Korean won fell substantially against the US dollar while government bond yields also slid lower, prompting the Bank of Korea (BOK) to hold an emergency monetary policy meeting where it announced it would provide unlimited liquidity to its financial markets.
Both examples highlight the fraught and unstable geo-political environment, underscoring the importance of maintaining a diversified and balanced portfolio that includes corporate bonds and other debt securities, which can offer attractive yields, relative stability, and a buffer against broader market volatility.
Aussie GDP Disappoint
Australian GDP data missed analyst expectations, increasing by an anaemic 0.8% from a year earlier, making it one of the weakest readings since 1991.
The result further solidifies the view that the economy continues to weaken and is being propped up by government spending, which was the primary driver of economic growth in the September quarter.
The data also revealed that household consumption remains very weak overall.
Aussie Property Valuations Slide Lower
Property values are falling in Australia, reflecting a shift in market conditions which are being driven by factors including increased borrowing costs, reducing affordability for many prospective buyers and cooling demand.
Additionally, economic uncertainty and tighter lending standards have added further pressure.
Separately, CPI data released last week indicates that the rate of rental price growth is continuing to weaken, signalling a gradual cooling in the rental market.
However, this moderation is still unfolding from a historically strong base, where high demand and limited supply had previously driven significant increases in rental prices.
Final Thoughts
Despite rising global political instability, equity markets continue to surge, defying expectations.
Additionally, with the property market also showing signs of losing steam, weighed down by rising interest rates and affordability challenges, corporate bonds and other fixed-income products are looking increasingly attractive as an alternative destination for investor capital.
Week Ahead
- RBA rate decision
- US inflation data
- ECB rate decision
- Aussie consumer and business confidence
*Data accurate as at 06.12.2024
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