Monday 24 July 2017 by Leigh Winton Week in review

From the trading desk

Australia continues its strong run of labour market statistics and a high AUD, however the RBA signals that rate rises could happen faster than expected

What’s trading

AUD

  • Clients continued to take advantage of the institutional bid on G8 Education’s fixed 2019 and switch their holdings prior to the early call date. The window closes on Monday as the call draws near. Clients purchased the Liberty Financial 2020 fixed rate bond, the most popular switch, which allowed them to reallocate to an investment grade bond. The bond remains in good supply and is offered at an indicative yield to maturity of 4.65% 
  • Interestingly, where there is usually oversupply we have instead had limited supply in the Australian dollar high yield space, as many clients are looking for an allocation to improve the overall yield on their portfolios.  Clients snapped up the supply that became available in the AxsessToday fixed and floating rate note bonds, as some clients moved in to USD bonds while the AUD dollar moved higher over the week. AxsessToday bonds are both still available with the fixed rate bond at an indicative yield to 2020 call of 6.36% and the floating rate bond at a projected indicative yield to 2020 call of 7.58%

Non AUD

  • USD  denominated bonds were in focus again last week as the AUD broke 79 cents on Tuesday and remained there for the majority of the week. Frontier Communications bonds proved the most popular among clients, following the recent addition of its April 2020 senior bond to our DirectBond menu. We have good supply in the Frontier 2020 at an indicative yield to maturity of 6.86%. For clients chasing higher yield, the Frontier 2023 bond is also available at an indicative 11.17% yield to maturity
  • American Axle & Manufacturing Inc started trading late last week as the newest addition to the DirectBond list. The company is a supplier to the automotive industry and a global leader in design, engineering, validation and manufacturing of driveline, metal forming, powertrain, and casting technologies. It operates primarily for automotive, commercial and industrial markets. The April 2025 bond pays a semi annual coupon of 6.25% and is currently available at an indicative yield to worst of 5.82%

Economic wrap

  • The RBA minutes last week seemed to point to higher rates with discussion of a 3.5% neutral cash rate. The next few days saw jawboning contradicting this, culminating in the RBA’s deputy governor Guy Debelle noting the discussion was of no significance
  • US data continued to be generally softer with CPI, retail sales, capacity utilisation and consumer sentiment all missing expectations
  • Australian jobs numbers were excellent on Thursday with a large increase in full time jobs and an unchanged unemployment rate, despite increased participation
  • Australian CPI is released on Wednesday with Bloomberg expecting 0.4% for the quarter, translating to a 2.2% year on year rate
  • Goldman Sachs reported earnings which beat estimates, but analysts focused on weak fixed income trading, which was significantly worse than J.P. Morgan, Citigroup and Bank of America

Other news

It was a wild ride on currency markets last week, inspired by both the RBA signalling to the market that rates were going to rise much faster than expected and growing concerns about the Trump administration’s ability to execute. This pushed up the AUD against most currencies, particularly against the USD which was falling at the same time.

On the RBA, the reality was that they actually didn’t signal anything about near term rate hikes. However, in quantifying their estimate of the theoretical neutral rate as 3.5% per annum, markets translated this as rates rising to that level in the next few years. The next day, deputy governor Guy Debelle hosed down thoughts of a rate hike, saying “No significance should be read into the fact that the neutral rate was discussed at this particular meeting.”

The AUD promptly fell nearly a cent, but still ended the week above 79 cents against the USD, well above where most forecasters believe it should be and where the RBA would like it to be.

In the meantime, Australia continued its recent strong run of labour market statistics. The underemployment rate fell to 13.9%, down from 15.3% in January this year. It should be noted that this same trend has occurred each year for the past three years – it peaks in January at 15% to 15.5%, falls quickly by May, stays low until October and then rises again due to some obvious seasonal impacts, particularly around the school year.

This underemployment issue and the related wage growth remains the major issue for the Australian economy. Combined with high household debt, it will be the driver of RBA policy for the next few years in particular.

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