Monday 25 July 2016 by Casper Wolski Week in review

Trading Desk

Potential weak inflation figure likely to increase chances of a rate cut, International Monetary Fund called on G20 nations to encourage public spending and BHP subordinated bonds continued to rally with clients taking profits on the USD lines

Economic Wrap

Quarterly Australian inflation data via the Consumer Price Index (CPI) is released on Wednesday with a weak number likely to increase chances of an RBA cash rate cut from 1.75% to 1.50% in August. The quarterly CPI number is forecast at +0.4% with the trimmed mean and weighted median numbers expected to be the same. As a reminder, the trimmed mean and weighted median numbers are part of the CPI numbers – their aim is to remove volatility in the overall quarterly CPI number, associated with large or irregular price movements so as to better estimate the underlying trend of inflation.

The AUD is trading lower at 0.7475 US cents with markets focusing on this week’s AUD CPI number and some stronger data from the US.    

US government bonds are slightly higher in yield at 1.5825% for the 10 year. Other major economy government yields are broadly unchanged with 10 year Japanese government bonds trading at a negative 0.235% yield, 10 year German bunds at negative 0.03% and 10 year UK government bonds (Gilts) trading at 0.80%.

Other news:

  • Stocks closed higher on Friday with European shares up 0.13% on the Eurostoxx and 0.46% higher on the FTSE 100. US shares were up 0.29% on the Dow Jones and up 0.46% for the S&P 500. US stocks were helped by the Purchasing Manager’s Index rising to 52.9 from 51.3.
  • The International Monetary Fund (IMF) called on G20 nations to increase public spending, saying the impact of lowering rates is starting to wane. 
  • G20 finance ministers and central bank governors met in China and reaffirmed their commitment to use all policy tools to help growth.
  • Japanese exports fell in June with overseas shipments declining 7.4% year on year.

Credit indices spreads are slightly lower over the last week, with the US Investment Grade Index (IG) finishing Friday down 2bps at 70.5bps, whilst the US High Yield Index (HY) decreased 5bps to finish Friday at 387bps.

Domestic interest rates are a little lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.72% and 2.14% respectively. Ten year Australian government bonds last traded at 1.92%, which is 8bps tighter over the week. The Australian iTraxx is 2bps lower over the week at 109.5bps (or 1.095% for this index of 25 Australian investment grade names).

Flows

BHP’s subordinated bonds continued to rally last week and we saw a number of clients taking profits on the USD lines. With a steady rally in the bonds alongside the improving commodities sector, clients are now cognisant of downside risks, particularly given the sell off we saw in the bonds shortly after their issue last year. 

In company news, BlueScope steel announced full year underlying earnings before interest and tax of $570m, up $70m on prior guidance, as well as an expected net debt reduction of 43%. This attracted some new interest in the company’s 2021 fixed coupon USD bond, which remains in good supply with a yield to maturity in the high 4% area.