Originally published by Commonwealth Bank of Australia
- Global bonds markets are moving higher, but struggling to do so convincingly. Central banks are more upbeat, and many are talking about unwinding stimulus. The BoC actually took a step in the “right” direction last week. The path for interest rates globally is higher. But the path is very gradual, full of potholes, and ends a lot sooner than previous cyclical paths.
- In Australia, the focus this week will be on the employment report Thursday. Headline prints have been very strong, with over 140k jobs created in the last 3 months. High underemployment and low wages growth remains a problem, however. In New Zealand, the CPI report Tuesday will be the local highlight. The CPI report will be weak, unwinding the strength of last quarter. Thoughts of RBNZ rate hikes in the next 12 months, should be postponed into late 2018/19.
- The outlook for high‑grade issuance shows semis a major issuer and the AOFM already running well ahead of task. We have lowered our Model Portfolio allocation to be +5% long (down from +10% prior).
“It's easy if you try. No hell below us. Above us only sky.”
Global interest rates are higher, but not a lot higher. Central banks are becoming more comfortable with the economic outlook. And some central banks are taking steps to reduce the extraordinary stimulus in the system. The Fed have all the pieces in place to start allowing their $4.5trn balance sheet to slowly, predictably, and gradually run off from September. And the Fed will most likely hike again this year. If they do, the (upper bound of) the Fed funds target rate will equal the RBA cash rate for the first time in 17 years. The path of Fed rate hikes will grind to a halt around 1.75‑to‑2.0%, however. The path to normality is shorter than most FOMC members realise. And the move to an actual tightening bias (pushing beyond neutral) is not yet imagined.
The BoC removed 25bps of “emergency” stimulus last week. And they are likely to remove another 25bps before too long. But a continued tightening cycle is a stretch of the imagination. We expect a BoC pause at 1.0% until the second half of 2018. The BoE have joined the fray, turning up the tightening rhetoric. We may get a hike (or two) out of the BoE. But with Brexit looming large, any hike(s) will be well considered, and given to cut in an ugly negotiation down the road. The BoE also have a balance sheet to unwind. It’s hard to imagine normalising policy ahead of the Brexit breakup.
The ECB has also stepped up “normalisation” rhetoric. But they have to stop easing first. The ECB are likely to start reducing purchases (QE) in September, with a completion of QE likely mid‑2018. Again, rate hikes or an unwind in the balance sheet, are not yet figments in their imaginations. The ECB are merely trying to stop buying, before they own too much. At current pace, the ECB will bump up against self‑imposed ownership restrictions in German bunds in less than a year.
In Australia and New Zealand, there is no need to blindly following the pack. The rise in global confidence is great for the Antipodean outlook. But until inflation poses a real threat to the higher side, then we have time on our side. For once, other central banks could do some of the work for us. The more they unwind stimulus, the more our interest rate curves will steepen. The more our interest rate differentials narrow, the more their currencies (should) strengthen relative to ours. The more our currencies’ ease, eventually, the more our tradables inflation lifts, and the more attractive our exports become. A shift to a tightening bias will lift Antipodean currencies even further. Local data out this week will support both the RBA and RBNZ sitting still, to wait and see.
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