Rate-Cut Bets Shrink for Fifth Week on Economic Growth: Australia Credit

Traders are reducing bets on an interest-rate cut in October for a fifth week after the Australian economy grew faster than forecast and the central bank said the nation is well placed to withstand global turmoil.

Reserve Bank of Australia Governor Glenn Stevens said yesterday policy makers have the flexibility to “maintain steady settings” while markets are unstable. Rising consumer spending and a rebound in exports drove the economy’s 1.2 percent growth in the second quarter, versus the 1 percent gain predicted by economists, the statistics bureau said yesterday.

The yield on the October cash-rate future rose to 4.57 percent today from 4.525 percent at the end of last week, after Stevens on Sept. 6 held the cash rate at 4.75 percent. On Aug. 9, the contract was at 3.84 percent. The two-year bond yield fell 12 basis points to 3.65 percent as of 11:58 a.m. in Sydney, paring yesterday’s biggest increase in seven months, after a government report showed the jobless rate unexpectedly climbed. Australia is the only developed nation where all government notes yield less than the central bank’s key interest rate.

“Up until the second quarter it looks as though the economy was doing very well,” said Paul Bloxham, chief economist for HSBC Holdings Plc in Sydney and a former RBA official. “The labor market shows that the economy looks as though it’s slowing a bit into the third quarter. On the basis of what we’ve seen so far, we don’t expect the RBA to be changing direction.”

Australian sovereign bonds have returned 10.3 percent this year, the best among 21 developed nations tracked by Bloomberg and the European Federation of Financial Analyst Societies.

Household Spending

Household spending, which accounts for 55 percent of Australia’s economy, rose 1 percent in the second quarter, adding 0.5 percentage point to GDP growth, yesterday’s report showed. The nation’s household savings ratio declined to 10.5 percent in the three months through June from 11.7 percent in the first quarter, the highest since the second quarter of 2009.

Private consumption was “the main upside surprise” in yesterday’s report, Annette Beacher, head of Asia-Pacific research at TD Securities Inc., said in a note to clients. “Now that the temporary soft patch is firmly in the rear-view mirror, we expect investment and exports to continue driving the economy to above-trend growth over the coming year.”

The economy will expand 4.3 percent in 2012, the fastest pace since 2007, according to analysts surveyed by Bloomberg. U.S. growth will reach 2.35 percent and Europe will expand 1.4 percent, the surveys show.

Commodity Exports

Australia’s economy is being driven by commodity exports including iron ore and coal, with mining investment in the 12 months to June 30, 2012, projected at A$82.1 billion ($87.3 billion), 45 percent higher than a year prior, the government said last week.

Business profits advanced last quarter by more than double economists’ estimates as resources and utility companies benefited from higher prices, a Sept. 5 report showed.

“RBA officials are a long way from abandoning their core belief that the mining investment boom is unusually large, and that it is resilient to the current troubles in markets,” Stephen Walters, a Sydney-based economist for JPMorgan Chase & Co. said in a research note after Stevens’ speech yesterday.

Household Caution

Households watching global and local events “may continue their precautionary behavior” and help weaken demand, Stevens told the Western Australian Chambers of Commerce and Minerals & Energy in Perth.

“If so, that may act to curtail the upward trend in inflationary pressures that has, up to this point, appeared to be in prospect,” he said.

Retailers and factories are getting hurt by a 15 percent gain in the currency in the past year that cuts export income. BlueScope Steel Ltd., Qantas Airways Ltd. and Westpac Banking Corp. announced plans last month to trim their workforces, and fiscal concerns in the U.S. and Europe are also weighing on confidence.

Australian employers unexpectedly cut workers for a second straight month in August, the statistics bureau said today in Sydney. The jobless rate rose to 5.3 percent, the highest since October 2010, from 5.1 percent.

Consumer Prices

Bond investors are estimating Australian consumer prices will rise at an annual 2.55 percent pace over the coming five years, according to the gap between indexed government debt and bonds that aren’t linked to inflation.

To help contain resource-fueled price pressures, Stevens boosted borrowing costs in seven quarter-percentage-point steps from October 2009 to November last year.

He held the key rate at 4.75 percent for a ninth straight meeting on Sept. 6, citing “unsettled” international markets.

“It is too soon to see much evidence of a concrete impact of these events on the global economy,” Stevens said yesterday.

Citigroup Inc. and UBS AG are among banks to cut forecasts for global growth as the sovereign crisis that began in Greece spreads to larger European economies and threatens the region’s common currency, while U.S. job growth stagnates.

U.S. 10-year Treasury yields fell to a record low 1.9066 percent on Sept. 6. The equivalent Australian note offered 229.5 basis points of additional yield today.

Bondholder Protection

The Australian dollar, the world’s fifth-most traded currency, fell 0.7 percent to $1.0588 in Sydney today.

The rate Australian banks pay to borrow from each other rose one basis point to 4.85 percent at the 10:08 a.m. Sydney fixing, according to the Australian Financial Markets Association. The spread between the bank bill yield and the rate to swap floating interest payments for fixed ones, a key gauge of banks’ reluctance to lend, widened to 33 basis points.

The Markit iTraxx Australia index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, declined 4 basis points to 168 basis points as of 10:42 a.m. in Sydney, according to Credit Agricole CIB prices. The risk benchmark reached 180.7 basis points on Sept. 6, the highest since July 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. One basis point equals $1,000 annually on a contract protecting $10 million of debt.

The extra yield investors demand to own company bonds in Australia instead of similar-maturity government debt rose 2 basis points to 223 basis points, or 2.23 percentage points, yesterday, according to Bank of America Merrill Lynch’s Australian Corporate & Collateralized Index.

The gap matches the widest since December 2009, the index shows. That’s frozen the market for new bond sales by non- financial companies in Australia, with the A$150 million sale of notes on July 8 by a local unit of Volkswagen AG the last such offering, Bloomberg data show.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.

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