Australian Bond Exchange Weekly Update
24th May 2024
Key points
- Rate hikes still a possibility – Federal Reserve and RBA
- UK inflation falls but less than expected
- Corporate profits fall worldwide
- Sign of the times – Telstra axes 2,800 jobs
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to April is 3.6%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to April is 3.4%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 2.3% in the year to April.
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 2.4% in the year to April.
Interest Rate Hikes Still A Possibility
Statements released this week from both the Reserve Bank of Australia and the U.S. Federal Reserve reveal that interest rates hikes remain a possibility and will be dependent on economic and inflation data.
While both central banks stated that monetary policy was currently sufficient, hawkish undertones have started to intensify, due to lack of progress on returning inflation to their respective targets.
Ultimately, this could result in unexpected rate hikes or less rate cuts, which could see heightened market volatility, especially in equity markets.
The RBA minutes stated that the “Board considered whether to raise rates, but judged the case for steady policy was the stronger option” while the Federal Reserve said “various participants mentioned a willingness to tighten policy further, should risks to inflation materialise in a way that such an action became appropriate.”
On Wednesday, the Reserve Bank of New Zealand also warned that it may resume raising interest rates.
If we rewind to just a couple of months ago, calls for imminent rate cuts was the prevailing narrative, but this has all but dissipated, underscoring the uncertain outlook for investors.
Whether we see another interest rate hike or not, with a higher-for-longer environment here to stay, corporate fixed-income securities may offer an attractive proposition for investors looking for consistent and stable returns.
UK Inflation Falls But Less Than Expected
The inflation rate in the United Kingdom fell from 3.2% in March to 2.3% in April but missed expectations of a 2.1% reading, dousing hopes of an earlier-than-expected rate cut from the Bank of England
Services inflation fell marginally from 6% in March to 5.9% in April, with the bulk of the move attributable to food and beverages, household goods, and communication services.
While the trajectory of interest rates is less certain in the U.S. and Australia, the disinflation process in Europe and the UK has been more consistent, and rate cuts in both economies are expected this year, which would follow cuts from Switzerland and Sweden.
Corporate Profits Fall Worldwide
Data compiled by Nikkei shows that worldwide corporate profits from 26,400 publicly traded companies fell in the first quarter of 2024 by 6% on average.
While Chinese companies experienced a circa 10% decline in net profit on average, American tech giants and semiconductor-related companies were experiencing strong tailwinds due to hype around generative artificial intelligence.
The companies included within the data account for over 90% of global market capitalisation and underscores the economic pressures which corporates are facing.
Sign of the Times – Telstra Axes 2,800 Jobs
As one of Australia’s largest employers, Telstra’s decision to slash approximately 10% of its workforce is both significant and telling.
While the decision to slash its workforce has been attributed to specific structural and sectoral reasons, economic growth in Australia is faltering while unemployment, despite coming from historically low levels, has been rising since June 2023.
Whether we see other large employers follow Telstra’s lead, the muted outlook for company earnings growth is a risk factor which investors need to remain cognisant of.
Final Thoughts
While the Australian economy remains in relatively robust shape compared to some global peers, growth is undeniably sluggish. With unemployment also on the rise, corporate earnings which have been resilient so far, could start to come under pressure.
While the Australian economy remains in relatively robust shape compared to some global peers, growth is undeniably sluggish. With unemployment also on the rise, corporate earnings which have been resilient so far, could start to come under pressure.
In some instances, this could see share price valuations falter, accompanied by dividend cuts. This highlights the relative attractiveness of fixed-income securities given that unlike shares, companies issuing these instruments are legally obligated to pay investors (at least while solvent), irrespective of company earnings or growth.
For more information about how corporate bonds and fixed-income can work within investment portfolios, speak to the Australian Bond Exchange today.
Week Ahead
- Australian retail sales
- Australia CPI Indicator
- Euro Area inflation rate
- U.S. PCE data
*Data accurate as at 24.05.2024
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