There was a lot of news over the week: the RBA held the cash rate at 2% and the AUD rallied to a seven week high against the USD. Overseas, the ECB announced it will extend its QE program by another six months and US employment data was released with figures as expected. In trading, Praeco bonds were made available to retail; subdebt continues to attract demand and good supply in Bluescope 2018 USD bond saw consistent buying from investors
Unsurprisingly, the RBA decided to hold the domestic cash rate at its record low of 2% last Tuesday, after RBA Governor Glenn Stevens had in the previous week suggested markets “chill out” and wait for new data before speculating on the direction of monetary policy. The accompanying statement reinforced that idea, by maintaining a data-dependent easing bias. The board’s next meeting is not until February.
Despite the RBA’s statement outlining that the AUD is still “adjusting to the significant declines in key commodity prices”, the AUD rallied to seven-week highs against the US dollar, largely trading in a 73 - 73.50 US cent range for the remainder of the week.
In other domestic releases, the Australian Trade Balance posted a $3.305bn loss, which was substantially worse than the expected $2.60bn loss. This was in stark contrast to third quarter GDP which came out at 0.9%, or 2.5% as a year-on-year figure. Although this remains below trend, it beat expectations due to stronger non-mining activity offsetting the decline in the mining sector.
Overseas, European Central Bank Governor, Mario Draghi’s expansion of Europe’s QE programme largely disappointed markets, which had anticipated a substantially larger increase in the scheme. Draghi announced that the ECB will extend its QE program by another six months, which will allow the Central Bank to continue to pump EUR60bn worth of liquidity into markets per month, primarily by purchasing sovereign bonds. As a result of Draghi’s disappointing announcement, the Euro fell by over 3 cents against the US dollar to 109.5 US cents, the largest intraday loss since 2009. Yield moves were also significant, with the 10 year German government bond rising in yield by about 20 basis points (bps) to 0.67%. The ECB also revised both its growth and inflation forecasts slightly, with 2017 projected growth revised up by 0.1% to 1.9% and inflation revised down 0.1% to 1.6%.
In the United States, Chair of the US Federal Reserve, Janet Yellen made numerous hawkish statements in regards to a potential December rate hike, emphasising improvements in the labour market since October and warning of delaying for too long. Atlanta Federal Reserve President Dennis Lockhart reinforced Yellen’s view, stating that “absent information that drastically changes the economic picture and outlook, I feel the case for lift-off is compelling”.
US employment figures were released on Friday and were largely in line with expectations:
- A total of 211,000 jobs were added in November
- Unemployment remained stable at 5.0%
- Moderate wage inflation was recorded
- The participation rate increased by 0.1%
Given there were no surprises to the downside with the employment figures, markets are increasingly expecting the Fed to hike rates later this month. Futures markets now imply a 74% of rates being increased this month.
Domestic yields rose over the week, most notably after the ECB announcement. Australian government bond yields rose 8bps and 9bps in the 3 and 10 year, to finish at 2.18% and 2.95% respectively. The Australian dollar also rose, gaining just over 1 cent to finish the week worth 73.39 US cents. Credit spreads contracted slightly with the Australian iTraxx index finishing 1bp lower at 123.8bps.
The Praeco nominal fixed rate bond became available to retail investors last week. Combined with some recent positive commentary from ratings agency Moody’s around Praeco, there has been renewed buying interest in the bond. Similarly, recent ratings agency comments around Royal Women’s Hospital and Qantas have spurred two-way flow, as some clients take advantage of the improved outlooks while others take the opportunity to take profit and assess alternatives.
Of those alternatives, the subordinated debt space continues to attract consistent demand. With investment grade credits paying high floating rate margins, investors are rebalancing portfolios take advantage. Liquidity in most lines is very good and our ever-growing suite of bonds available in the space covers a wide range of major and regional banks and insurers.
In the foreign currency space, investors who were sitting on the sidelines saw the uptick in the AUD as a buying opportunity. Good supply in Bluescope 2018 USD bond saw consistent buying from investors preferring a shorter term to maturity. Meanwhile, continued weakness in the commodities space saw BHP pullback further, following on from some negative news flow in the previous week, and investors showed a renewed focus across their USD lines callable in 2020 and 2025.