Last Thursday, Australia’s official unemployment rate fell from 6.2% to 5.9% and government bond yields were higher over the week. In trading, two new primary issues means that supply of FIIG originated bonds at attractive levels is good
Economic Wrap
Last week, was a quieter week for economic data. However, markets continued to digest the strong US payroll figures from the previous week and the implications for interest rates. With better than expected employment and wage price inflation data, expectations are that the Fed will raise rates at their December meeting. The minutes of the last meeting will be released later this week and may give us some more clues to their intentions.
In contrast, disappointing US retail sales and Producer Price Index (PPI) data was released on Friday night. Retail sales were up by 0.1% in October and PPI contracted 0.4% for the month – both 0.1% better than the previous period, but below expectations and the PPI numbers could mean we see further weakness in CPI later this week.
Back home in Australia, we had our own release of positive employment figures last Thursday.
October saw substantial full-time and part-time jobs added; 40,000 and 18,600 respectively. We also saw the participation rate tick up by 0.1% to 65.0%, which is positive, but can usually lead to an increase in the unemployment rate without a commensurate increase in jobs. Despite the higher participation, the very strong jobs growth meant our unemployment rate fell from 6.2% to 5.9%. Craig Swanger’s recent article “Unemployment data - take a closer look” goes into some further detail on our real unemployment rate and how the RBA may read the data differently to the market.
Given the positive headline employment figures, markets adjusted their expectations for an RBA rate cut. Market implied probabilities had pencilled in February as a coin-toss for an RBA move lower, this has now reduced to an one in three likelihood. Interestingly, some small chance of a rate increase in the second half of next year has also emerged, after there being no such expectation prior to the domestic job numbers.
With consensus views now realigning for higher central bank rates, it is no surprise that we saw yields higher over the week, particularly in the short end. Our Australian Government Bond yield curve flattened, with the 3 year higher in yield by 11bps to 2.15% and our 10 year up 7bps to 2.95%. The Australian dollar also followed suit, finishing the week 0.86 cents higher at 71.27 US cents. Credit spreads were wider over the week, as measured by the iTraxx Australia index, finishing 5bps higher at 119.75bps.
Flows
Last week trading was dominated by FIIG deals. For clients who missed out on the primary market Ansett bond, there was some positioning ahead of the bond commencing secondary trading on Friday. Furthermore, the launch of our next deal for Sunland Group, means we have supply at attractive levels across a number of FIIG originated bonds as investors liquidate to reallocate into primary transactions.
We are also seeing strong take up in the new-style lower Tier 2 space. With the major banks expected to ramp up issuance, the market has repriced subordinated debt cheaper ahead of the added supply. Meanwhile, increased bondholder safety given all the recent equity raisings from the banks is making those better margins especially compelling. Clients looking to boost the investment grade floating rate portion of their portfolios are generating most enquiries, particularly given the higher liquidity generally offered on these notes.