Australian Bond Exchange Weekly Update
Friday 13th October
Key Points
- Australian consumer sentiment inches slightly higher
- U.S. inflation remains sticky at 3.7%
- Restrictive policy to remain in place: Federal Reserve
- Middle east uncertainty rattles markets but oil sells off
- IMF increases U.S, growth outlook forecast
- “Monetary policy slowing the growth of demand and inflation”: RBA’s Kent
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 August is 5.2%.
- 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 August.
- The European Central Bank Cash Rate (deposit facility) is 4.00%pa, to fight an annual inflation rate of 5.2% in the year to August.
Australian Consumer Sentiment Inches Higher
Despite the challenging situation which Australian households face, the Westpac-Melbourne Institute Consumer Sentiment Index increased by 2.9% to 82 in October, up from 79.7 in September.
While the data shows that the mood is slightly more optimistic, a reading of 82 is still low overall and ‘deeply within pessimistic territory’.
The Institute’s press release stated that “while there are some glimmers of hope around family finances and the outlook for jobs, these are being overshadowed by still-high inflation and renewed rate rise concerns”.
Federal Reserve to Maintain Restrictive Policy Until Inflation Eases
FOMC meeting minutes released this week reveal that the U.S Federal Reserve intends on keeping restrictive monetary policy in place until inflation eases sufficiently and returns to its 2% target.
While the minutes stated that “a vast majority of participants continued to judge the future path of the economy as highly uncertain,” there was unanimity in the view that one more increase in the target federal funds rate at a future meeting would likely be required.
Since the September FOMC meeting, the 10-year Treasury note yield climbed to 4.88%pa to price in the expected increase however, yields have since tapered due to escalating tensions in the Middle East.
Middle East Uncertainty Rattles Markets but Oil Sells Off
Middle East tensions rattled global markets this week with shares sliding and the U.S. 10-year Treasury yield tapering however, Saudi Arabia which is the world’s largest oil exporter pledged to keep the market stabilised.
The statement alleviated investor concerns that a larger Israel-Hamas confrontation could spill over in the region and disrupt the supply of oil, resulting in prices retreat by approximately 2%.
IMF Increases U.S. Growth Outlook Forecast to 2.1%
The International Monetary Fund (IMF) has updated its latest U.S growth forecast, increasing expectations by 0.3%, underscoring continued American economic strength and resilience.
The upgrade was attributed to various factors including tight labour conditions which reflected last week’s 336,000 new jobs created vs 170,000 expected in non-farm payrolls, strong consumption growth, and increasing business investment and government fiscal policy.
The global economic growth forecast was unchanged at 3% for the year while the eurozone forecast was slashed by 0.2% to 0.7%.
Despite the various headwinds which investors currently face, the projections don’t suggest that a recession is imminent, with IMF Chief Economist Pierre-Olivier Gourinchas characterising the economy as ‘limping along’.
“What we’re saying is that 3% is not a global recession, far from it, but it’s also not the kind of growth that we’re used to when looking at the pre-pandemic period, which was more around 3.6, 3.8%. So we characterize this by saying the global economy is kind of limping along, it’s not sprinting right now.”
IMF, Chief Economist Pierre-Olivier Gourinchas
Bloomberg Briefing: RBA’s AG Christopher Kent Believes Most of Monetary Heavy Lifting Done
ABE attended a Bloomberg Briefing this week to hear directly from the RBA’s Assistant Governor (financial markets) Christopher Kent, who believes that most of the monetary policy heavy lifting is done.
“Some further effects of rate increases to date are still to be felt through the economy, which will provide further impetus to lower inflation in the period ahead”
RBA, Assistant Governor, Financial Markets, Christopher Kent
The comments provide further weight to the notion that interest rates may have peaked and investors subscribed to this view may want to consider whether their investment portfolios are positioned appropriately within corporate fixed-income.
Final Thoughts
Given the higher for longer environment, muted growth forecasts, and an increasingly challenging geo-political backdrop, our view is that a defensive and balanced investment portfolio is essential.
We believe the attractive yields of high-quality corporate fixed-income provide investors with significant opportunity, not only to lock in a desirable rate, but to also capitalise on any future uplift in valuations in the event of rate cuts.
For more information, speak to an adviser today.
What’s Coming Up?
- Release of the RBA’s latest meeting minutes
- U.S. retail sales and building permits
- U.K unemployment figures
- Japanese inflation figures
- And a slew of Chinese data including GDP, retail sales, and more
*Data accurate as at 13.10.2023
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