The US cash rate decision is published on Thursday morning AEST, and widespread consensus is a 25 basis point hike in rates
Economic Wrap
Markets are taking it as a foregone conclusion that the Fed will raise rates 0.25% at this week’s meeting, which will move the Fed Funds rate target to a 0.50% to 0.75% range. The accompanying text to the FOMC meeting should provide guidance on the Fed outlook for further rate rises in 2017 and 2018, and an understanding of where they see rates reaching in this cycle. US data has shown some strength of late but markets know the Fed want to make sure they do not dampen growth.
Oil has risen after Saudi Arabia announced it will cut output more than expected. The lead futures contract (January West Texas intermediate WTI), rose above USD54 after the Saudi Energy Minister, Khalid Al-Falih, committed to the substantial cuts from 1 January, according to Bloomberg.
Last week’s Australian GDP miss continues as a reminder that our economy will take time to catch up to the US economy. No economic forecasters expect a second successive negative print which would signal the economy is in recession, however the negative -0.5% number was the largest fall since the GFC.
US government bonds were higher in yield over the week, with the 10 year bond at 2.49%. Other major economy government yields are higher too. Current 10 year Japanese government bonds are trading at a 0.06% yield, 10 year German bunds are trading at 0.365% and 10 year UK government bonds (gilts) are trading at 1.45%.
Other news:
- Stocks were higher on Friday. In Europe, the Eurostoxx was up 0.37% and the FTSE 100 was up 0.33%. In the US, the Dow Jones was up 0.72% and the S&P500 was up 0.59%
- Italian bank woes continue, with the European Central Bank (ECB) having reportedly denied an extension for Monte dei Paschi to organise a capital restructuring plan. We note that Monte dei Paschi is not the only Italian bank needing fresh equity
- US preliminary consumer sentiment rose, as measured by the University of Michigan survey. The rise to 98.0 marks a 10% increase during the past two months
- Chinese inflation numbers were stronger than expected, increasing 2.3% year on year in November, compared to a 2.1% rise in the previous month
Credit indices spreads are lower over the last week with the US Investment Grade Index (IG) finishing Friday down 2.0 basis points (bps) at 67.00 bps, whilst the US High Yield Index (HY) narrowed 30 bps on the week to finish Friday at 355.5 bps.
Domestically, the 10 year Australian government bonds last traded at 2.87%, 8.0 bps higher on the week. The Australian iTraxx is at 102.5 bps (or 1.025% for this index of 25 Australian Investment Grade names), down 6.5 bps over the week.
The Aussie dollar is trading at 0.7440 today, which is little changed from last week. Our dollar seems rangebound with the expected USD repatriation – based on Trump policy, once he is officially in office - that is USD supportive. This being offset by higher commodity prices which is AUD supportive.
Flows
Last week we saw a lot of secondary trading activity in the retail space, with the addition of another FIIG originated security to the retail bond menu. Ansett Aviation Training (AAT) is the largest independent flight simulator training business in the southern hemisphere and has been operating for over 40 years. The AAT fixed rate bond has a final maturity in November 2020, and is callable in 2017. Please contact your dealer for more information.
In the foreign currency space, the sale of USD denominated resource bonds has remained a key theme as strong institutional demand put clients in a good position to take profits. BHP Billiton, Fortescue Metals Group and Newcastle Coal Infrastructure Group have been the main sale targets as clients shifted their exposure towards securities in less volatile industries.