US jobs figures “solid” but wages still “subdued”

08 December 2017

The U.S economy has managed to maintain a rate of unemployment which is the lowest for the period since February 2001. According to the U.S. Bureau of Labor Statistics, the U.S. economy gained 228,000 jobs in the non-farm sector in November while October’s figure was revised down from +261,000 to +244,000 but September number was revised up from +18,000 to +38,000. The market’s median expectation for employment growth in November was +210,000.

After revisions to previous months’ figures, the unemployment rate remained unchanged at 4.1% as 90,000 either found work, retired or stopped looking for work. Average hourly pay rates reversed a dip in October and was 2.5% higher than in October 2016.

The total number of employed persons in the non-farm sector at the end of November was 147.2 million and 153.9 million overall. Over the past twelve months, 1.9 million jobs have been created in the U.S. with almost all of them in the non-farm sector. Another figure which is indicative of the state of the U.S. economy is the employment-to-population ratio. After a volatile few months, this ratio has settled down and came in at 62.7% for a second month in a row.

ANZ senior economist Felicity Emmett described the figures as “solid” but then she went on to focus on the wage inflation issue. “In a nutshell, economic and employment momentum remain very solid, but wage growth is subdued in the context of the broader environment….inflation expectations [are] well anchored, technological change, global integration of supply chains, increased labour mobility and low global inflation.”

Financial market reaction was unremarkable. The U.S. 2 year yield remained steady at 1.79% while the 10 year yield gained 1bp to 2.37%. The U.S currency was slightly stronger against the yen but steady against the euro. According to cash futures prices, the implied probability of a rate rise by the U.S. FOMC at its upcoming December meeting was unchanged at 100%.

Private investment strong in latest GDP figures

06 December 2017

A recession is generally defined by economists as two consecutive quarters of negative GDP, an event which last occurred in Australia in 1991 which became known as “the recession we had to have”. Since that time, Australia has had the odd negative quarter, such as in the September quarter of 2016 and the March quarter of 2011, but not two in a row.

The latest figures released by the ABS indicated third quarter GDP grew by 0.6%, just under the 0.7% expected by economists. Even though the growth rate over the September quarter was less than June’s 0.9%, the year-on-year figure increased from 1.9% (after revisions) to 2.8%, which was also under the 3.0% figure expected.

Bond yields and the Aussie dropped on the release of the figures. 3 year bond yields finished the day 7bps lower at 1.96% and 10 year yields were 9bps lower at 2.53%. The local currency dropped from 76.15 U.S. cents to 75.85 U.S cents and then finished around 75.80 U.S. cents.

Oxford University’s inaugural century bond

05 December 2017

Most of the time when one thinks of long term bonds, maturity dates 20 or 30 years from now come to mind. Those readers who have been around financial markets are probably aware the U.S Government has been an issuer of 30 year bonds for decades and even the Australian Government has joined the thirty-year club recently. However, there is long term and then there is really long term; fifty years, seventy years or even one hundred years.

One hundred year bonds are not common but they are not exceptionally rare, either. China, the Philippines, Mexico, Austria, Belgium, Ireland all have issued “century” bonds. Even serial defaulter Argentina got one away as in June this year.

It is not just sovereigns which issue the ultra-long bonds. There are also corporate 100 year bonds on issue. Coca Cola, Petrobas and Disney all have them, although Disney’s bond is callable after 30 years in 2023.

The latest century bond issuer is the University of Oxford. Oxford recently received a AAA credit rating from S&P in preparation for its inaugural £750 million (AUD$1.35 billion) bond sale. The bonds mature in December 2117 and have a 2.544% coupon. According to Westpac, they were priced at U.K treasury bonds + 85bps (although it is a bit of a mystery as to which maturity Treasury bond the comparison was made).

(U.S. Department of the Treasury. Corporate bond spot rate, Federal Reserve Bank of St. Louis)

RBA rate unchanged at December meeting

05 December 2017

The December meeting of the RBA Board is not one of the four months of the year traditionally associated with RBA rate changes. November, along with February, May and August are statistically much more likely to be the months in which the RBA changes its official rate. The thinking is these are the months following quarterly releases of CPI figures and the RBA uses the data to confirm its forecasts of the likely trajectory of inflation.

No economists or commentators expected a rate change to come out of this meeting. Prices of contracts in the cash futures market implied a near-zero chance of a change at this meeting and for several months in 2018. Prices were largely unchanged after the decision was announced.

As expected the RBA held the official rate steady at 1.50%. The press release which accompanied the decision has some amended sections but the essence of the message is largely unchanged from that of the November meeting. On the plus side, the global conditions “have improved over 2017” and the RBA’s forecasts for Australian GDP growth “to average around 3% over the next few years”. The labour market has been strong over 2017 and “various forward indicators continue to point to solid growth”. Finally, underlying inflation “remains low”. On the minus side, household incomes are growing slowly and debt levels are high.

Westpac chief economist Bill Evans said “the most interesting change” in Governor Philip Lowe’s statement was the reference to the Australian dollar. The exchange rate of the Aussie no longer appears to be an issue for the RBA. He also noted the RBA’s recent tendency to note reports of employers’ difficulties in finding workers “with the necessary skills.” He thinks this has not yet become a pressing issue for the RBA because Lowe stated “wage growth remains low and is likely to continue for a while yet”.

Retail sales recover but still “weak”

05 December 2017

Australians appear to have gone on a food binge according to the latest retail sales figures for October. Increased spending on food in cafes and restaurants, as well as food items purchased from supermarkets, grocery stores and convenience stores, accounted for around three-quarters of the overall increase in total retail sales during the month.

Total retail sales (seasonally adjusted) increased by 0.5% in October, after rising by 0.1% (revised up from 0.0%) in September. On a year-on-year basis, sales grew by 1.8%, up from the 1.5% annual rate recorded in September. These latest figures put an end to the string of months in which the annual growth rate has fallen.

October Australian retail sales figures

The figures were more than the 0.3% increase which was expected and bond yields and the Aussie dollar jumped on the news. 3 year bonds ended the day up 7bps at 2.03% while 10 year bonds finished 6bps higher at 2.62%. The local currency jumped from just above 76 U.S cents to as high as 76.55 U.S. cents before easing back to around 76.40 U.S cents.

November inflation ticks up

04 December 2017

The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis instead of quarterly. It has turned out to be a reliable leading indicator of the CPI, although there are periods in which the Inflation Gauge series and the CPI have diverged, only for the two series to eventually converge over the space of six to twelve months.


During November, the Inflation Gauge increased by 0.2%, which takes the annual rate to 2.7%. In October, the comparable figures were 0.3% and 2.6%.

Markets barely reacted to the figures and yields on 3 year and 10 year bond futures were only a little higher by the end of the day. The 3 year yield was 2bps higher at 1.97%, the 10 year yield inched up 1bp to 2.56% and the local currency slipped to just under 76.00 U.S. cents.

Asymmetric notes to pay 8%

04 December 2017

Sponsored by Laminar Capital

Asymmetric Credit Partners Pty Ltd (“Asymmetric”) has launched a $6.0 million senior secured note issue.

The notes will be used to provide bridging debt finance to the Northam Solar Project (as outlined below) and will be first ranking senior secured liability of the Northam Solar Farm Unit Trust (“The SPV”). Note holders will have the benefit of a general security deed over the Northam Solar Project assets and the assets of Carnegie Clean Energy (ASX code: CCE), which is the owner of the Northam Solar Project. Further working capital facilities or loans undertaken by CCE or the SPV are not permitted without the prior permission of note holders with the exception of the project financing requirements for projects to be undertaken by CCE.

Asymmetric will issue the notes and provide $1.5 million subordination to the noteholders through an equity investment into the deal, creating a $7.5 million segregated asset pool to secure the $6 million bond issue.

CCE is the 100% owner and developer of the CETO Wave Energy Technology intellectual property and is also 100% owner of leading Australian batter/solar microgrid engineering procurement and construction company, Energy Made Clean.

Advertising survey bodes well for employment

04 December 2017

ANZ’s job advertisement survey is well-known as a leading indicator of employment numbers in Australia. It reflects changes in demand for labour and it provides another measure of activity in the economy. There is also a fairly good inverse relationship between changes in Australia’s unemployment rates and changes in the RBA cash rate. Understanding the path of Australia’s unemployment rate has historically provided a reliable indicator of RBA rate changes.

November’s figures have been released and, after revisions, total advertisements were 1.7% higher at 172,395 (seasonally adjusted), up from October’s revised figure of 169,577. On a 12 month basis, job advertisements were 11.2% higher while October’s comparable figure was 12.5%.

ANZ's job advertisement survey

ANZ Head of Australian Economics David Plank said Australia’s employment market is likely to improve. “Another steady rise in ANZ Job Advertisements in November along with other leading indicators suggests a positive outlook for the labour market, particularly given the solid prospects for economic growth.”

The inverse relationship between job advertisements and the unemployment rate is quite strong (see below chart). An increasing number of job advertisements as a proportion of the labour force should lead to lower unemployment rates in the near-future.

Surging high-rise approvals in Victoria

30 November 2017

Aside from engineering and architectural design, one of the earliest requirements of a building project is to obtain approval from the relevant statutory body. As a result, building approvals data is a leading economic indicator of future construction. While not all projects which have been approved are completed, all completed projects will have been granted approval. Approvals data thus provides a useful indicator of future construction.

The latest building approval figures have been released by the Australian Bureau of Statistics and they show a small rise in October. Compared to September, total October dwelling approvals were 0.9% higher. On a 12 month basis, total approvals were 18.4% higher than in October 2016.

House approvals rose by 1.9% in October, which translates to a 6.0% rise over the previous 12 months. Apartment approvals are a lot more volatile (see chart below) and they fell by 0.2% when compared to September. However, due to a dramatic fall in October 2016, apartment approvals in this October are 37% higher than last year.

Lending slows in October

30 November 2017

The pace of lending to the non-bank private sector by financial institutions in Australia eased back a little in October. Lending to home owners continued to be the main driver of total loan growth while the rate of growth in lending to the business sector remained well below its long-term average.

According to the latest RBA figures, private sector credit grew by 0.4% in October, up from the 0.3% growth recorded in September. The year-to-October growth rate of 5.3% slipped from September’s comparable figure of 5.4% (after revisions) as personal loans contracted and business and investor loans grew at about the same rate as inflation.

The overall increase was driven by owner-occupier loans, which increased by 0.5% over the month or 6.3% for the 12 months to October. Business credit growth picked up from a 0.1% growth rate in September to 0.3% in October but at the same time, its annual growth rate dropped for the second month in a row, this time from 4.3% to 4.0%. These two segments of total lending account for nearly three-quarters of new loans by value and thus any change in them has a greater effect on overall credit growth.

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