Last week, the cash rate was left unchanged at 2%, second quarter GDP figures and retail sales disappointed. The global sharemarket experienced further volatility and in Australia, yields tracked lower over the week. We saw a lot of action in the non-AUD space and the flight to quality continues
Economic Wrap
Domestic markets
Last Tuesday, the RBA kept the official cash rate on hold at 2%. The overwhelming consensus in markets was for no rate change so given the decision we saw little reaction from markets. The RBA’s accompanying statement added little in the way of additional commentary, however, it did provide further acknowledgment of Chinese and emerging market weakness over the past few weeks.
Additionally, second quarter GDP figures were released last Wednesday with growth coming in at 0.2%. This was less than market expectations of 0.4%. Retail sales also disappointed, coming in at -0.1% for the month, compared to a market expectation of 0.4%. This was the worst quarterly start to retail trade in three years. Both figures seem to allude to weaker domestic economic growth and reinforce the possibility of another rate cut later this year.
Yields tracked lower over the week, with 3 and 10 year Australian Government bonds lower by 9 and 12 basis points, to 1.74% and 2.63% respectively.Global equity markets had yet another tumultous week, with most markets experiencing volatile price action. The ASX followed suit, finishing the week down 4.24%.
The AUD was also down against the USD , dipping under 70 cents following our weak GDP numbers. The AUD finished the week at 69.08 US cents, down about 2.5 cents from Monday. Credit margins widened over the week, with the iTraxx index up about 5 basis points to 113.
International markets
Markets have maintained that recent volatility is a result of concerns over China and world economic growth. However, over the weekend at a G20 meeting, a representative from the People’s Bank of China said he expects market volatility to calm, as leverage in markets has abated through the recent sell-off.
In Europe, its Central Bank lowered it forecasts for GDP and inflation while announcing changes to its current quantitative easing program. The Governing Council decided to increase the limit on how much of an individual bond issue it can buy, from 25% to 33%. This raised the possibility that the current quantitative easing program could be increased in scope through its size, composition and duration.
In the US, mixed employment data was released on Friday night. Non-farm payrolls increased by 173,000, well below the expected 217,000 increase and the participation rate dropped by 0.1% to 62.6%. On the plus side, the unemployment rate dropped from 5.3% to 5.1% and increases in both wage growth and hours succeeded.
Flows
With the AUD falling under 70 US cents last week, the non-AUD space was very active. We saw interest both ways, with clients selling into profits made on the longer term currency trend, yet many investors remained bearish on our dollar so we also had a lot of buying in names such as Newcrest, Fortescue, Virgin and Friends Life.
In the AUD space, the flight to quality continues with investors taking advantage of our attractive supply in the Sun Group 2024 floating rate note. We continue to have supply in this investment grade name for the moment. We also had strong buying in both the Royal Women’s Hospital nominal and inflation-linked annuity bonds.
New on our DirectBonds list, and a valuable addition to our investment grade corporate suite, are the three new bonds from Apple. These include both fixed and floating 4 year notes and a 7 year fixed coupon bond. Given the sheer size of the total bond issue, at $2.25bn, supply in these is excellent. Please contact your dealer for further details and pricing.