Aussie Rates Traders Blind to Commodities Slump as Services Fire

  • Easing chances over 12 months fall to 20% from 92% on Nov. 9
  • Cause for cautious optimism in services, Bank of America says

Forget the commodity slump, traders are paring bets on easing from Australia’s central bank and Bank of America Merrill Lynch says an interest-rate increase is possible. 

Traders see about a 20 percent chance that the Reserve Bank of Australia will take its cash rate below 2 percent over 12 months, down from 92 percent on Nov. 9, swaps data showed as of 11:53 a.m. on Thursday in Sydney. Yields on Australian two-year bonds climbed 22 basis points in the past three months to 2.12 percent, the largest increase among developed nations.

“We think they’re done on cutting interest rates further and the next move will be up, it just won’t be for a long time,” Alex Joiner, the Melbourne-based Australia economist at Bank of America, said Wednesday. “Services has been an area that’s gradually starting to improve and we’re seeing that be a significant factor in keeping the unemployment rate stable.”

An employment report released on Thursday surprised analysts by showing an increase in payrolls of 71,400 for November, the biggest monthly increase since July 2000. While capital spending, export prices and retail sales data have painted a downbeat picture for the economy, there’s cause for “cautious optimism” in areas from health care to technical services, which are less well accounted for, Joiner said.

Bank of America says spending by Australians on services from mobile phones to health care shows Australia’s economy is gaining momentum. It was one of three institutions predicting higher benchmark rates over the next 12 months in a Bloomberg survey published Dec. 4, a minority among the 26 economists polled. The median prediction was for the benchmark to remain at 2 percent over the year, while 11 forecast further easing.

The following charts show the declines in rate-cut bets, the recent trend in jobs growth and which industries are expected to see the biggest gains going forward as well as recent improvement in business sentiment.

CHART 1: Traders in the swaps market have pared their expectations for easing by the RBA in the coming year. Back in October the market was pricing in at least one quarter-percentage-point cut and possibly two, according to data compiled by Bloomberg.

CHART 2: The Australian economy added more than 344,000 jobs in the 12 months through November, the most for a rolling 12-month period since January 2008, according to official government data.

CHART 3: Health care and social assistance will be the biggest source of new jobs over coming years, maintaining its position as the sector that’s created the most fresh opportunities in Australia since the 1990s, according to the Department of Employment. Positions in education, technology and financial services will all climb more than 10 percent in the five years through November 2019, government forecasts show.

CHART 4: National Australia Bank Ltd.’s gauge of business conditions has risen to 10.2 from 2.4 in January, above its long-term average. Meanwhile, the RBA has lowered its benchmark to an unprecedented 2 percent in a bid to bolster growth and combat currency strength. The annual pace of gross domestic product growth remains below its historical average, although it did reach a faster-than-expected 2.5 percent in the third quarter of 2015.

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