Linkers Show Inflation Set to Slow Even With GDP Booming: Australia Credit
Investors expect Australian inflation will slow, allowing the Reserve Bank to keep cutting interest rates as unemployment rises, even with the economy expanding at the fastest pace in four years, government bond yields indicate.
The gap between rates on five-year government notes and inflation-linked debt show traders expect a 2.29 percent annual increase in consumer prices through 2016, at the lower end of the RBA target. The jobless rate rose last month as employers unexpectedly cut positions, according to government data that followed a report yesterday showing gross domestic product growth in the past two quarters was the strongest since 2007.
Benchmark 10-year yields have dropped 33 basis points since Sept. 30 to 3.89 percent, set for the longest run of quarterly declines since 1998 following the Asian financial crisis, as concerns mount that Europe’s debt turmoil will damage global trade. Australian bonds are the second-best developed-world performers this year, Bloomberg data show. A pipeline of resource projects has cushioned a slump in services and manufacturing hit by the Aussie dollar’s climb to a record.
“The high currency and a small increase in unemployment may mean modest fourth-quarter inflation and that would give the RBA room to cut rates further,” said Peter Jolly, head of market research at National Australia Bank Ltd. (NAB) “While there are large risks to growth ahead, the economy has been quite strong and growth will continue to recover into the New Year provided Europe’s issues don’t become aggravated.”
Traders are betting the central bank will cut rates by as much as 1.25 percentage points within 12 months, the largest expected declines across the developed world, Credit Suisse Group AG indexes show.
Yesterday’s data from the statistics bureau in Sydney showed the only Group-of-10 economy to avoid a recession during the global credit crisis was well placed before Europe’s financial turmoil intensified.
GDP grew 1 percent last quarter and a revised 1.4 percent three months earlier, the fastest six-month gain since March 2007.
Finance Minister Penny Wong said the GDP report reflects “a very good economic story for Australia,” in a Bloomberg News interview. Private business investment is driving growth and incomes are rising in the context of low unemployment “and inflation that’s contained,” she said yesterday.
Australia’s jobless rate rose to 5.3 percent from 5.2 percent, the statistics bureau said today, after matching a more-than-two-year low of 4.9 percent in March and April.
The number of people employed fell by 6,300 after a revised increase of 16,800 in October, the statistics bureau said. The median estimate in a Bloomberg News survey of economists was for a 10,000 advance.
Reserve Bank Governor Glenn Stevens lowered rates this week in the first consecutive cuts since 2009 to boost demand after consumer confidence deteriorated this half with purchasing manager surveys indicating manufacturing, construction and services are contracting.
Investors increased bets for a 50-basis-point cut at the next policy meeting Feb. 7, interbank futures showed today. The contracts indicate a better than 50 percent chance the central bank will lower its benchmark to 3 percent, matching the least since 1960, by June.
The RBA, which considered raising rates as recently as August to head off inflation, said Dec. 6 that consumer-price growth will likely remain within the bank’s target range of 2 percent to 3 percent in 2012 and 2013.
The five-year breakeven rate dropped to 2.18 percentage points last month, the lowest level since at least 2009, after reaching a peak of 3.14 points in May. Annual inflation was 3.5 percent in the third quarter, slowing from 3.6 percent, the government reported in October.
Australian inflation-linked notes returned 17 percent to investors this year, including reinvested interest, heading for the best annual performance in data stretching back to 1997, Bank of America Merrill Lynch indexes show. The securities have climbed the most across 18 markets tracked by Merrill Lynch.
Rising exports and A$456 billion ($467 billion) of planned mining and energy projects helped spur the local currency to $1.1081 on July 27, the strongest since it was freely floated in 1983.
Europe’s troubles have weighed on the so-called Aussie in recent months. The world’s fifth most-traded currency has fallen about 7 percent since its peak on concern Greece would default and trigger a repeat of the 2008 credit freeze after the collapse of Lehman Brothers Holdings Inc.
Ratings at Risk
Germany and France risk losing their AAA credit ratings in a review of 15 euro nations, Standard & Poor’s said Dec. 5 as the region struggles to lower budget deficits with unemployment near 10 percent.
Yesterday’s report showed Australia’s economy expanded 2.5 percent in the third quarter from a year earlier, faster than the 1.9 percent increase predicted by economists. Mining increased 3.7 percent, adding 0.3 percentage point, it showed.
China is Australia’s biggest trading partner and its demand for iron ore, coal and energy drove the nation’s terms of trade -- a measure of export prices relative to import prices -- to a record this year.
In Western Australia, the nation’s main center for iron ore, employers added 11,600 jobs compared with 2,800 positions in New South Wales. Overall, the number of full-time jobs plunged by 39,900 in November and part-time employment rose by 33,600, data today showed.
The two reports highlighted what the RBA has called a multi-speed economy, with Western Australia leading growth while the two most-populous regions -- New South Wales and Victoria, contributed almost nothing to last quarter’s expansion.
Government bonds in Australia returned 13.4 percent this year, including reinvested interest, behind only the U.K. among 26 markets tracked by the Bloomberg/EFFAS indexes. Australian sovereign debt is heading for its biggest gains since 2008.
Australia’s longer-maturity securities are likely to perform better than peers as the government funding arm halts issuance after tomorrow, UBS AG said. The Australian Office of Financial Management said Nov. 29 that it won’t hold bond tenders from Dec. 10 to Jan. 31.
“For the next two months Australian bonds will outperform the rest of the world,” said Matthew Johnson, an interest-rate strategist at UBS AG in a briefing in Sydney today. “There will be a supply drought.”
Low Yields Predicted
The sovereign bond market is benefiting from Australia being “one of the strongest AAA-rated countries,” and the risk in 2012 is that bond yields will remain low, he said.
The premium investors demand to hold Australian corporate bonds instead of government debt increased 36 basis points over the past month to 281 yesterday, and touched the widest since July 2009 at 286 last week, Bank of America Merrill Lynch indexes show.
“The first RBA interest-rate decision of the New Year should extend the period of rate cuts,” said Paul Brennan, a senior economist at Citigroup in Sydney. “Further insuring the economic expansion against downside risks from Europe now that partial domestic indicators for the fourth quarter are showing some moderation is the path of least regret, particularly as early calculations suggest inflation will be extremely soft in the fourth quarter.”
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