Australian Bond Exchange Weekly Update
Friday 15th September
Key Points
- U.S. inflation increased faster than expected in August as gas prices soar
- Australian consumer sentiment slides but jobs data reveals a resilient economy
- UK unemployment and wages rise as economy shrinks by 0.5% in July
- Financial concerns for retirees mount in Australia as cost of living pressures bite
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate remains unchanged at 4.1%pa as inflation cools
- The US cash rate (policy rate) is currently between 5.25-5.5%pa, and the annual inflation rate for the 12 months to August is 3.7%, up 0.6% in August
- The UK Bank Rate currently sits at 5.25%pa to fight an inflation rate of 6.8% in the year to July.
- The ECB Cash Rate (deposit facility) is 4.25%pa, to fight an annual inflation rate of 5% in the year to June.
U.S. Inflation Increases Faster than Expectations
The U.S. CPI index increased by 0.6% in August, marking the biggest monthly gain of 2023 and increasing by 3.7% from a year ago. Core CPI data, which excludes volatile items like food and energy, also increased by 0.3% month-over-month and 4.3% year-on-year.
As anticipated, higher gasoline prices were the largest contributor to inflation overall, accounting for more than half of the increase. This should come as no surprise given global oil prices continue to trade near 7-month highs.
The shelter index, which measures the cost of housing including rent, was the second largest contributor, rising for a 40th consecutive month.
The figures have triggered a wave of worry that more interest rate hikes from the Federal Reserve could come as soon as next week.
Australian Consumer Sentiment Slides Lower While Unemployment Holds Steady
Australian consumer sentiment is in the doldrums with the Westpac-Melbourne Institute’s Consumer Sentiment Index falling by 1.5% to 79.7. The figures indicate a further weakening in consumer optimism and it has been reported that such a sustained period of pessimism hasn’t been seen since the 1990s.
Respondents flagged inflation and cost of living (53%) as the primary concern, followed by budget and taxation (34%), and worsening economic conditions (34%). Interestingly, just under half (48%) of respondents expect rates to rise over the next year which was a significant decrease from 68% in August.
On the jobs data front, unemployment held steady at 3.7% while employment grew by 65,000 jobs. The participation rate, which provides an estimate of an economy’s active workforce, has now hit new highs, increasing from 66.9% to 67%.
UK Economy Contracts as Unemployment and Wages Rise
The UK’s GDP contracted by 0.5% in July which was worse than analyst expectations and widely reported due to ‘rain and strikes’ and marks the fastest contraction in growth in seven months.
The unemployment rate in the UK increased to 4.3% in the July quarter, up from 4.2% in the previous 3 months. Average earnings also increased by 7.8%, their fastest rate on record excluding during the pandemic period.
Following the data, Bank of England policymaker Catherine Mann said it was too soon to stop raising interest rates, with inflation still higher in the UK than in any other G7 country.
“I would rather err on the side of over-tightening. But if I am wrong and inflation decelerates more quickly and activity deteriorates more, significantly, I will not hesitate to cut rates.”
Catherine Mann, Monetary Policy Committee, Bank of England
Older Australians Increasingly Concerned About Retirement
As reported in The Australian, older Australians are cutting back on spending as cost-of-living pressures mount. Key concerns relate to unknown future health and age care costs, along with the need to provide financial support to younger family members.
Unsurprisingly, interest in fixed income securities has been increasing as investors look to investments which provide greater certainty via a regular and stable income stream.
Since January 2020, the yield on the 10-year Australian Government Bond has increased by more than 630%, rising from circa 0.568%pa to 4.128%pa, and yields on corporate fixed-income securities have increased even more.
As such, the ‘bonds are back’ narrative is in full swing however, there are several considerations to be aware of given rising interest rates can lead to lower bond prices, while inflation can erode real returns.
Short-term fixed income securities, including bonds, are generally less sensitive to interest rate fluctuations, making them less volatile than those that are longer dated. Given the trajectory of inflation, and therefore interest rates, remains unclear, a diversified portfolio of fixed-income investments can provide investors with enhanced protection.
How the Australian Bond Exchange Can Help
The Australian Bond Exchange (ABE) offers various corporate fixed-income securities, most of which have relatively short terms between 3-5 years. For more information about how corporate fixed-income securities can benefit you, speak to an ABE adviser today.
What’s Coming Up?
- U.S FOMC meeting and interest rate decision
- Bank of England meeting and interest rate decision
- Bank of Japan meeting and interest rate decision
- UK Inflation data and retail sales
*Data accurate as at 15.09.2023
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