Last week, the RBA left the cash rate unchanged, national employment data was released and the response to APRA’s new capital requirements continues with Westpac increasing its hybrid offering. In the US there is more speculation over a potential rate hike this year and back in Australia, reporting season has begun
Economic Wrap
Markets
As expected, the Reserve Bank (RBA) left the cash rate unchanged at 2% last Tuesday, releasing a statement that reinforced the RBA’s data dependent outlook regarding a rate cut. However, the RBA did provide some key adjustments to its previous minutes, acknowledging the “stronger growth of employment and a steady rate of unemployment over the last year” in its statement. The RBA also did not repeat its comments regarding further depreciation of the dollar, instead saying that “the Australian dollar is adjusting to the significant declines in key commodity prices”. As a result of the RBA’s omission, the dollar jumped 1% to US73.80 cents on Tuesday. So, while there is still significant expectation amongst markets that the RBA will cut rates further, market sentiment is that the cut will occur later than previously anticipated.
Australia’s employment data was released last week and came in mixed. Unemployment increased to 6.3% for July, missing the market expectation by 0.2% whereas the participation rate increased to 65.1% from 64.8%. Additionally, there was a 38,500 increase in employment for the month, beating estimates by 28,000. Markets had a mixed reaction to the data, with the Australian dollar initially rallying, to then fall and close the day lower.
In other domestic news, the monthly AiG manufacturing index data was also released, coming in at 50.4 compared to 44.2 in June. Retail sales figures were also positive, beating market expectations by 0.3% by coming in at 0.7% on the month.
In response to APRA’s new capital requirements, the major banks have continued their bid to raise additional Tier 1 capital, with Westpac announcing a $500m increase in its recent hybrid offering, bringing the bank’s total to $1.25bn. ANZ also completed a capital raising for $2.5bn on Thursday from institutional investors. They hope to raise an additional $500m through a share purchase plan aimed at retail shareholders. ANZ’s share price fell dramatically by 8% following the announcement. Bond holders are pleased, as the raisings provide an additional buffer in the capital structure. For more detail on this topic please see “How changing banking regulations affect you” in related articles below.
US
Atlanta President of the Federal Reserve, Dennis Lockhart made headlines last week following an interview with the Wall Street Journal regarding a potential rate hike in September. Lockhart stated that “my priors going into the [September] meeting as of today are that the economy is ready and it is an appropriate time to make a change”. Lockhart’s comments echoed another voting member of the FOMC, St Louis President of the Federal Reserve, James Bullard made last week. Lockhart’s comments were of particular interest to markets, as he is perceived as a moderate member of the FOMC and therefore a barometer for the possibility of a future rate hike.
Strong US nonfarm payrolls data released late last week has sparked further speculation there will be a rate increase next month. Nonfarm payrolls increased by 215,000 in July in line with market expectations, with wages also rebounding after stalling the prior month. The unemployment rate held at a seven year low of 5.3%.
Yields and currencies
The AUD crept higher last week due to relatively strong data and news flow. Earlier in the week the AUD closed at US72.86 cents, rallying on Tuesday to US73.80 following the RBA meeting. Mixed employment data saw the AUD ease off, but it ended the week higher at AUD74.18 cents on strong retail sales and manufacturing data. It has started this week lower off the back of US nonfarm payrolls results released on Friday night.
In yields, both the 5 and 10 year Australian Government bonds traded wider across the week, reversing an early rally in the week to 6bps wider midweek and closing the week at 2.15% and 2.84% respectively.
Flows
Domestic reporting season has begun, with both Virgin Australia and Downer Group Finance Pty Ltd releasing results last week. See the “Company Updates” note for more information on each companies’ results.
Demand for high quality paper continues, with the remaining Residential Backed Mortgage Security (RMBS) SMHL 2015-1 C notes sold last week with no supply currently behind the $3m on offer. Another floating rate note bond of the same quality is Sun Group 2024, which continues to remain popular, with almost $1m bought by FIIG clients.
In the inflation space, the indexed annuity bond Novacare 2033 remains the flavour of the month for inflation hedging and portfolio diversification. We purchased more of the bond from the institutional market to satisfy internal demand. At the moment there is a ready supply of this bond.
FIIG originated bonds have picked up, with buying action last week in CBL 2019 , 360 Capital 2019 and W.A Stockwell 2021. Supply in these bonds remains inconsistent and you should contact your FIIG Representative if you are interested. Selling out of earlier FIIG originated bonds and into the more recently issued SCT 2021 fixed was also a common trade last week.
In other news, Cash Converters was again in the media last week regarding another class action against the company. This softened the price and created two-way flow as clients bought in to the opportunity. Buying in Dicker Data 2020 has increased since the news of its successful recent $45.5m equity raising. The price on the bond held steady despite yields weakening last week.