Australian Bond Exchange

ABE Weekly: Material Change Confirmed – RBA Hikes Again

Australian Bond Exchange Weekly Update

Friday 10th November 

Key Points 

  • Material change confirmed – RBA hikes again
  • IMF revises China outlook
  • European inflation expectations rise
  • Jerome Powell – “we will not hesitate”
  • Have yields peaked?

Global Cash Rates & Inflation

Material Change Confirmed – RBA Hikes Again 

The RBA Board hiked the cash rate once again this week from 4.10% to 4.35% after stronger-than-expected inflation and retail sales galvanised Governor Bullock into action.

Despite creeping levels of political interference, with inflation continuing to sit stubbornly at 5.4% it has become clear that more restrictive monetary conditions are needed to prevent inflation from becoming too deeply entrenched.

While some economists are forecasting more interest rate rises, the RBA’s latest statement revealed a small but salient shift in messaging from ‘some further tightening’ to ‘whether further tightening’ will be required’.

This more dovish sentiment reflects similar messaging emanating from the Federal Reserve, where the Atlanta Federal Reserve President recently stated he didn’t think any further rate hikes were needed.

“I actually don’t think we need to increase rates anymore… I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%.

Raphael Bostic, Atlanta Fed President

IMF Revises China Outlook

The IMF has raised China’s growth projections for 2023 and 2024 due to stronger-than-expected Q3 consumption, with the new estimates at 5.4% and 4.6%, up from the previous 5% and 4.2%.

The revision reflects the IMF’s growing optimism about the impact of Chinese government stimulus on the economy despite ongoing challenges in the overleveraged property sector.

European Inflation Expectations Rise

The latest ECB Consumer Expectations Survey reveals that consumers expect inflation to increase over the next 12 months, increasing to 4% from 3.5%.

Economic growth expectations were also subdued, with the outlook standing at -1.2% compared with -0.8% in the month prior.

Collectively the figures demonstrate the growing pessimism across Europe as the economy grapples with higher interest rates, lower output, and sluggish growth.

Jerome Powell – “We Will Not Hesitate”

The Chairman of the U.S. Federal Reserve has reiterated that the central bank will continue to move carefully and is “attentive” that stronger growth could “undermine inflation progress”, which could warrant a monetary policy response.

Have Yields Peaked?

With Australian government bonds now matching the dividend returns generated from the S&P ASX200, it’s unsurprising to see investors continuing to flock towards fixed-income investments.

Given inflation continues to persist with the economy remaining in reasonable shape, a ‘higher for longer’ environment seems increasingly likely, and this will have material implications for Australian economic growth.

While it’s impossible to know just how long conditions will remain restrictive, it is undoubtedly good news for fixed income investors, proving a timely opportunity to lock in desirable coupon rates now.

The Sweet Spot

While cash is also undeniably attractive right now, an overallocation can expose investors to significant reinvestment risk, when and if rates do eventually decline.

Conversely, corporate fixed-income securities with maturities of 2 – 4 years are offering returns of 6 – 8% pa, providing attractive and reliable income streams.

Final Thoughts

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Last week, we announced our latest exclusive market-linked security for one of the world’s most reputable banking institutions – Barclays Bank PLC. 

With a $25.55 billion market capitalisation, excellent credit rating, and robust financial position, this exclusive investment opportunity offers investors with a 6-6.50% p.a. return paid quarterly for 5 years.

For more information or to reserve an allocation, simply click the link below or contact an adviser today. 

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Week Ahead 

  • Westpac consumer confidence
  • NAB business confidence
  • U.S. inflation figures and retail sales
  • U.K. inflation figures and retail sales

*Data accurate as at 10.11.2023 

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