Last week, our CAPEX figure printed much lower than market expectations and this week we await GDP growth and the RBA cash rate decision. In the US, its GDP figure was higher and the majority of economists still expect a Fed rate rise in December. We saw investors trading to rebalance their portfolios to reflect a higher credit rating overall and there is good supply in the BHP foreign currency bonds
Economic Wrap
Australia
Last week, the third quarter capital expenditure (CAPEX) figure printed at -9.2%, considerably weaker than the -2.9% consensus prediction. The figure represents the change in funds spent by Australian businesses on acquiring or maintaining fixed assets, such as land, buildings, and equipment, relative to the previous quarter.
Other upcoming data releases include the GDP growth figure, which is expected to come in at 2.3% for the year and retail sales which are expected to have increased by 0.4% in October. The GDP figure follows after the Australian Treasury cut its long term growth forecast from 3.00% to 2.75%, citing slowing population growth as the main cause of the slowdown. On Tuesday, the RBA will meet for the last time this year until February 2016. Despite generally disappointing data of late, markets almost unanimously predict that the RBA will hold the cash rate steady at 2%.
US
Third quarter GDP was revised up to 2.1% as an annualised figure last week, which was in line with expectations however, there was some concern that increases in inventories contributed an artificial boost to the growth number. Nonetheless, markets were not fazed and continue to forecast the Federal Reserve (Fed) raising rates in December. This stance has been reinforced by hawkish commentary from a number of Federal Open Market Committee (FOMC) members. Of them, St Louis Fed President, James Bullard pointed out that going forward there will be more uncertainty from each meeting, as markets have become accustomed to zero rates for seven years. According to futures markets, the market implied probability of a Fed Funds rate hike next month is now at 72%.
Expectations of a US rate rise strengthened the USD last week, weakening the AUD by 0.40 US cents to 71.93 US cents. This was exacerbated by commodity concerns out of China and falling iron ore prices over the week. Yields were also lower, with our three and 10 year Australian Government bonds down 5 and 7 basis points (bps) to 2.09% and 2.84% respectively. Credit spreads widened by 6.5bpsover the week, with the Australian iTraxx index finishing at 125bps.
Flows
With the recent rating outlook upgrade for Royal Women’s Hospital, there was renewed buying in both the indexed annuity (IAB) bond and the nominal bond. On the back of the upgrade, the fixed rate bond traded 20bps lower and the IAB bond was 15bps tighter, in yield terms. Supply remains stable across both bonds.
Investors looking to rebalance their overall portfolio credit rating average, switched from Sydney Airports 2030 inflation linked bond into the Australia Gas Networks (AGN) 2025 inflation linked bond (ILB). The AGN 2025 ILB is one of the higher rated inflation bonds, and is currently available to clients at over 5% assuming a 2.5% inflation rate*.
The BHP foreign currency bonds were trading lower last week, in response to negative news flow including speculation that it will halve its dividend and costs associated with the disaster in Brazil. We saw some investors take advantage of the buying opportunity and supply remains good across all four lines.
*Rates are approximate and indicative only – subject to change. Please contact your FIIG representative for more detail.