A drop in Australian consumer demand that sparked the biggest weekly slump in retail stocks in more than two years is spilling into the nation’s credit markets.
The cost to protect the bonds of mall owner Westfield Group jumped to an eight-month high last week after David Jones Ltd. cut profit forecasts and a report showed consumer confidence fell by the most since Lehman Brothers Holdings Inc. collapsed in 2008. Government bond yields declined the most in more than 2 1/2 years as investors added to bets the central bank will lower interest rates.
Australian household spending, which represents about half the nation’s economy, has stalled amid natural disasters, falling home prices and increased savings. The S&P/ASX 200 Retailing Index extended declines today after tumbling 13 percent last week, its biggest drop since October 2008.
“The weakness in the Australian retail sector has taken a further leg down, and we expect an increasing number of retailers will be requiring rent assistance or being forced to close their stores and default on leases,” said Ben Byrne, a Sydney-based credit analyst at Nomura Australia Ltd. “While this will have a greater impact on equity, it will also cause a general underperformance of the sector in credit.”
Earlier this month the Reserve Bank of Australia said that the nation’s growth pace may be weaker than previously forecast, retreating from a prediction two months earlier that the economy will expand 4.25 percent this year, the fastest pace since 1999.
“The dramatic and rapid deterioration in trading conditions in 2011’s fourth quarter has been unprecedented,” David Jones Chief Executive Officer Paul Zahra said in the retailer’s statement on July 13.
Australia’s second-largest department-store chain cut the hours worked by floor staff in June and July because of lower sales, Sydney-based spokeswoman Helen Karlis said today.
Credit-default swaps on Sydney-based Westfield Group, the country’s biggest mall owner, climbed 13 basis points last week to 130 basis points on July 15, the highest since Nov. 3, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets.
Swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Westfield Retail Trust’s A$800 million of 7 percent bonds due in October 2016, which were priced to yield 120 basis points more than swap rates in April, widened to a spread of 139 today, Australia & New Zealand Banking Group Ltd. prices show. The Sydney-based company owns stakes in 42 Australian malls containing more than 11,000 shops, according to its website.
The relative yield on shopping center-owner Stockland’s A$300 million of 8.5 percent 2015 notes surged to 162 from as low as 134 on April 26, Commonwealth Bank of Australia prices show. Retailers David Jones, Myer Holdings Ltd. and Harvey Norman Holdings Ltd. don’t have bonds outstanding, Bloomberg data show.
Traders added to bets over the past week that the RBA may repeat its record rate cuts of 2008 as debt crises in Europe and the U.S. intensified.
Standard & Poor’s and Moody’s Investors Service may lower the AAA rating of the U.S., the risk assessors said last week, as lawmakers clashed over raising the nation’s $14.3 trillion debt ceiling. Europe’s woes have entered a new phase, and policy makers must come up with a “clear” response to stop the contagion that threatens the euro, the European Central Bank’s incoming president, Mario Draghi, said July 13.
The prospects of international financial turmoil are weighing on consumers in Australia, adding to domestic concerns including a proposed carbon tax and falling house prices, said Joshua Williamson, senior economist in Sydney at Citigroup Inc.
“We’ve got full employment at the moment, wages are rising, but that’s being tempered by all this negative news out of Europe,” he said.
Westpac Banking Corp. economists led by Bill Evans said July 15 that the bank expects the RBA to reduce rates by 100 basis points, with a 25-basis-point cut in 2011 and the rest in 2012. The unemployment rate may rise as high as 5.75 percent next year, from 4.9 percent last month, they said in an e-mailed statement.
Yields on government bonds maturing in six years or less held below the cash rate of 4.75 percent today and the 10-year yield dropped 32 basis points in five days to 4.91 percent on July 15, the biggest weekly drop since November 2008. The 10-year rate declined to 4.89 percent as of 5:18 p.m. in Sydney.
The extra yield investors demand to hold Australian corporate bonds instead of government debt rose four basis points last week to 176, a Bank of America Merrill Lynch index shows.
Australian homeowners are more pessimistic about the housing market as falling prices and slowing rental growth damp growth expectations, a National Australia Bank Ltd. poll showed June 14. Home prices fell 2 percent in the second quarter and rental growth slowed to 1.3 percent, Australia’s fourth-largest lender said in an e-mailed report.
Mortgage holders are grappling with the highest benchmark interest rate in the developed world after RBA governor Glenn Stevens raised the benchmark seven times between October 2009 and November 2010 as he sought to control price pressures from the nation’s biggest mining boom in a century.
The Australian dollar, the world’s fifth-most traded currency, fell 1 percent last week to $1.0653 on July 15 in New York. The so-called Aussie has risen 22 percent against the greenback in the past 12 months, and traded at $1.0611 today.
Business confidence in the nation dropped to a six-month low in June on a rising currency and signs of weaker global growth, according to a National Australia Bank survey of more than 400 companies released July 12.
Australia’s consumer sentiment index plunged 8.3 percent to 92.8 for July from a month earlier, the biggest decline since October 2008 and the lowest level since May 2009, according to a Westpac and Melbourne Institute survey of 1,200 consumers taken July 4-9. Retail sales unexpectedly fell in May, led by declines on clothing and footwear spending, according government data.
“Sentiment surrounding the retail sector has been weak, with sluggish sales growth,” Citigroup Inc. analysts led by David Burgess wrote in a July 14 report. For retail landlords, “key sources of potential downside include declining occupancy and lower leasing spreads.”
Credit-default swaps on GPT Group, Australia’s second-biggest diversified property trust by market capitalization, climbed 10 basis points last week to 142. Contracts on Woolworths Ltd., the country’s biggest supermarket owner, rose six basis points to 78, according to CMA. The Markit iTraxx Australia index of contracts on 25 of the nation’s biggest companies rose 13 basis points to 124.
“Credit markets have done a reasonable job of pricing in the risk of a rapidly de-gearing consumer and a resulting weaker economy,” said Chris Viol, a Sydney-based credit analyst at UBS AG. “So it’s hard now, to trade from the short side; if anything, we’re watching some CDS names from the long side given how much widening we’ve seen.”