Australian Bond Exchange Weekly Update
9th August 2024
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 June is 3.8%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to June is 3.0%.
- The Bank of England Bank Rate currently sits at 5.0%pa to fight an inflation rate of 2.0% in the year to June.
- The European Central Bank Cash Rate (deposit facility) is 3.75%pa, to fight an annual inflation rate of 2.5% in the year to June.
Global Market Rout Wipes Billions from Equity Markets
Equity markets sold off aggressively around the world this week amid growing concerns over a U.S. recession and the risks of a fully-fledged regional war in the Middle East.
The ASX 200 tanked some 5%, but this was overshadowed by the Japanese Nikkei index which slipped more than 12%, its biggest single day drop since 1987. It was a similar story in U.S. and European markets with all major indices experiencing material declines.
The so-called ‘yen carry trade’ has been a key driver of institutional money flows, but the sudden change in Japanese policy triggered a spectacular and aggressive response from investors with a rapid rush for the exits – dubbed a speculative unwind.
This volatility underscores the inherent risks and sensitivities in global financial markets, where policy shifts and geo-political events can quickly lead to significant capital movements and market dislocations.
While bonds and other fixed-income securities weren’t immune from this volatility, long-term buy and hold investors would have barely noticed, as the coupon on their fixed interest securities remains unchanged.
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RBA to Hold for Next 6 Months
The RBA held the official cash rate steady at 4.35% per annum this week after quarterly inflation data came in better than expected.
While the above is undoubtedly good news, the RBA has ruled out any rate cuts before Christmas and released economic forecasts showing that the Bank doesn’t expect inflation to return to its 2–3 per cent target band until December 2026.
Despite Bullock continuing to talk a tough game, financial markets are now pricing in one rate cut this year.
Chinese Export Figures Miss Expectations
Chinese export data eased in July, indicating that global demand for goods is weakening, underscoring the effectiveness which higher interest rates are having on the global economy.
China is already grappling with weak domestic demand, high unemployment, and a prolonged real estate downturn, so the thought of reduced global demand which has cushioned its manufacturing and industrial industries is surely not a welcome one.
Week Ahead
- Australian consumer confidence data
- U.S. inflation data
- U.K. inflation data
- Japanese GDP
*Data accurate as at 09.08.2024
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