Australian Bond Exchange Weekly Update
Friday 19th January
Key points
- Aussie consumer confidence: new year, same fear
- Upside surprise for UK inflation
- China’s growth tipped to slow to 4.6% in 2024
- Solid U.S. retail sales tell a story of resilience
- German economy contracts 0.3% in 2023
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 November is 4.3%.
- The US cash rate (policy rate) is currently between 5.25-5.5, and the annual inflation rate in the year to December is 3.4%.
- The Bank of England Bank Rate currently sits at 5.25%pa to fight an inflation rate of 4.0% in the year to December.
- 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 November.
Aussie Consumer Confidence: New Year, Same Fear
The Westpac Melbourne Institute Consumer Sentiment Index slid 1.3% to 81 in January, down from 82.1 in December.
The data shows that despite growing speculation that interest rates may have peaked, Australian consumers are still highly anxious about cost of living and higher debt costs.
Since financial markets (especially equities which sit at lofty valuations) have not been burdened by this uncertainty, it raises some concerns over whether this exuberance is misplaced.
According to Westpac’s report, the result is within the bottom 7% of all observations since the survey commenced in the mid-1970s, underscoring the dire sentiment among Australian consumers.
Interestingly, the survey reveals that a majority of Australians expect further rate increases which pits them against bond markets which are pricing in cuts, a view also shared by many prominent economists.
This is yet another example of the pervasive uncertainty in the market, and one which benefits bonds due to their inherent certainty.
Upside Surprise For UK Inflation
UK inflation unexpectedly increased to 4% in December, up from 3.9% in November and beating a forecasted 3.8% increase.
The surprise result has somewhat diluted market expectations of rate cuts as early as March or April, although markets (at the time of writing) are still pricing in over 100 bps of BoE rate cuts by year end.
According to Britain’s Office for National Statistics, the December increase was largely attributable to a rise in tobacco duty, increased seasonal air travel, clothing and entertainment prices.
China’s Growth Tipped to Slow to 4.6% in 2024
A consortium of international investment banks has tipped that China’s economic growth will slow to 4.6% in 2024, the slowest pace in decades.
While China just posted its annual GDP data for 2023, revealing solid growth of 5.2%, it grapples with a highly leveraged real estate sector, an aging population, and high youth unemployment.
Despite the litany of challenges facing the Chinese economy, remarks from Premier Li Qiang at the Davos World Economic Forum were optimistic and reaffirmed China remains an attractive destination for foreign capital.
“No matter how the world’s situation changes, China will adhere to its fundamental national policy of opening up, and its door will only get wider and wider”.
Li Qiang, Premier, People’s Republic of China
Solid U.S. Retail Sales Tell A Story Of Resilience
Stronger than expected U.S. retail sales data shows that the American economy remains in robust shape, reinforcing views that a soft landing can be achieved.
Retail sales increased 0.6% in December and core retail sales were up 0.8%. Motor vehicles and parts dealers accelerated 1.1%, building material and garden equipment outlets increased 0.4%, and clothing sales increased 1.5%.
The data highlights the positive momentum in retail sales which is indicative of a resilient consumer base, and a healthy labour market – both of which indicate support for consumer-facing businesses such as Macy’s Inc.
German Economy Contracts 0.3% in 2023
The economic engine of the Euro Area contracted by 0.3% year-on-year in 2023 as higher interest rates slammed the brakes on economic growth.
The manufacturing sector, excluding construction, fell by 2%, led by lower production in the energy supply sector, while household consumption contracted by 0.8% on the year.
Economic growth for the fourth quarter also contracted by 0.3% compared with the July-September period.
While the outlook for Germany and the broader Euro Area remains muted, inflation is converging towards 2%.
Final Thoughts
With looming elections in the U.S., UK, Germany, India and elsewhere, coupled with soaring geo-political tensions, volatility is likely to persist into 2024.
Just this week we witnessed bond markets wobble after Fed Governor Waller doused hopes of an imminent pivot in monetary policy.
While the timing may be contested, there is still growing consensus that rates will begin to trend lower in many jurisdictions.
Whether the upside surprise in UK inflation is just a one-off or is indicative of a global resurgence, investors should consider whether their portfolios are appropriately positioned for a myriad of eventualities.
For more information about our available fixed-income securities, contact an Australian Bond Exchange adviser today.
Week Ahead
- NAB Business Confidence Survey
- Euro Area interest rate decision
- Bank of Japan interest rate decision
- U.S. GDP Growth
- U.S. Core PCE Index
*Data accurate as at 19.01.2024
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