Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Singapore Sales Trader
Pressure has been piling up on the Australian economy lately: the Australian dollar has dipped to a two-month low and a slew of weak economic data has strengthened the odds for an interest rate cut. GDP has slipped to a dismal +0.2% in its latest print (quarter on quarter) against a forecast of +0.5%, its weakest level since December 2016. While the annualised basis growth came in at +2.3% this is still far away from the 3% forecast for this calendar year.
Just earlier this week we saw the Reserve Bank of Australia hold its official cash interest rate at 1.5% for the 28th consecutive meeting, despite a consistently poor showing in economic data, especially in the housing market. Interestingly, the options market was actually pricing in twice the amount of volatility for the last RBA meeting, perhaps indicating that each policy meeting going forward could be a “live event”.
The poor Australian housing data, crippled retail and household spending, and declining asset prices typically lead to consumers becoming more cautious henceforth about their own spending and consumption. The chart below shows that residential house prices have now slid into negative territory on an annualised basis, a persistence of which could lead to repeat of the situation in in 2011-2012 when housing prices were in negative territory YoY for around a year. In the policy minutes that were released in February it was apparent that housing is now a much bigger worry for the RBA than the trade war was in previous meetings.