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Two years after it last held an auction of the residential mortgage-backed securities (RMBS) it had bought after the GFC, the Australian Office of Financial Management (AOFM) has announced it will hold another auction to offload some of its holdings. The AOFM is seeking to sell RMBS issued by a variety of trusts from loans originated by Firstmac, AMP (Progress), Macquarie Bank (PUMA), Bendigo and Adelaide Bank (Torrens) and Wide Bay.

The AOFM acquired the holdings as a result of its programme to maintain liquidity in Australian wholesale credit markets during the GFC and its aftermath. Confidence in western financial markets had been significantly diminished after the collapse of Lehmann Brothers and Bear Stearns. The AOFM began in November 2008 when it bought a total of $1.5 billion worth of securities. It then purchased another $5.8 billion in 2009, $4.7 billion in 2010 and $2.1 billion in 2011.

RMBS are amortising securities. That is, over time the balance owing to the holder is reduced as borrowers pay down their mortgages. These mortgages had been sold by a bank, building society or mortgage provider to a trust which then issued units. It is these units which are referred to as residential mortgage-backed securities.

The November meeting of the RBA Board is 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.

Prior to this particular November meeting few, if any, economists or commentators expected a rate change of any sort. Prices of contracts in the cash futures market implied a near-zero chance of a change, not only for November but for other contracts well into 2018.

As expected the RBA held the official rate steady at 1.50%. The press release which accompanied the decision is largely unchanged from that of the October meeting. The global economy “continues to improve” and the RBA’s forecasts for Australian GDP “are largely unchanged”. GDP is expected to average “around 3% over the next few years.” The labour market continues to strengthen. “The unemployment rate is expected to decline gradually” and “various forward indicators continue to point to solid growth”. Finally, underlying inflation “is likely to remain low for some time”.

The housing market remains at the heart of the RBA’s concerns. “Housing debt has been outpacing the slow growth in household income”. However, the RBA expects pressure to ease through a combination of demand and supply changes, all other things being equal. Demand should ease after credit standards “have been tightened” while a “considerable additional supply of apartments is scheduled to come on stream”.

Reactions from economists was quite diverse. Some think the RBA is too optimistic and overstating Australia’s growth rate in 2018 and beyond while others went the other way. Here’s what a few of them had to say about the decision and the RBA statement:

Felicity Emmett  ANZ

Given recent disappointments on retail sales and inflation, today’s statement was keenly anticipated to gauge the RBA’s assessment on the outlook. The RBA held the line though and remained relatively upbeat about the outlook. While concerns around the consumer remain, the Bank remains positive about the investment outlook, both private and public, and seems to be more optimistic about the unemployment outlook. The statement noted that the forecasts for growth to be published in the Statement on Monetary Policy on Friday are largely unchanged, but we see a risk that the unemployment rate forecast for December 2019 is revised down as far as 5%.

Michael Workman  CBA

Today’s RBA statement was not markedly different to the previous one. An RBA rate rise is definitely in the next chapter. The current chapter has unusually low inflation and wages trends against a background of slowly improving growth in local and trading partner economies. From a monetary policy perspective, the unchanged cash rate of the last 16 months looks to have another year to run.

Damien Boey Credit Suisse 

We think that the RBA has too positive a view of the economy and its drivers…The risk is that growth slows as the RBA leaves rates unchanged over the next few months. We expect that the bond market will react to this with more curve flattening, as rate hikes are priced out, and easing risks are increasingly factored in. Our real yield curve model continues to point to at least another 35bps of flattening in the next few months.

Tim Baker  Deutsche Bank 

All up, the RBA has made few material changes, with the statement retaining a neutral bias. We remain less confident about a wages pick-up than the RBA, and look forward to Friday’s SMP for further detail on how the RBA sees the consumer outlook. We continue to view the RBA being on hold until 2019.

George Tharenou   UBS

Overall, the RBA held rates and stayed neutral as we expected. They still see “little change” to their view of improving global growth supporting better GDP & gradually higher CPI – but [it] will likely still downgrade both in Friday’s SOMP. Looking ahead, we still expect the RBA to keep the cash rate on hold until 2H-18, while they wait to see the extent to which better global growth leads to faster domestic activity and CPI, as well as the impact of macro-prudential policy tightening on housing and consumption.

Bill Evans  Westpac

There remains a difference of opinion between us and the Bank on the growth and inflation outlook. The Bank is expecting above-trend growth next year despite uncertainty around the household sector and with the associated closing of the output gap along and a gradual move towards full employment, they will continue to forecast inflation moving back to 2.5% in 2019.

We accept that if that dynamic does come to pass, then the Bank will see opportunity to raise rates next year. However, our growth outlook is much flatter, particularly given our view on household incomes and wages, we do not expect that the need will arise to raise rates in 2018.

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.

Figures for October have been released and, after revisions, total advertisements were 1.4% higher at 169,600 (seasonally adjusted), up from September’s revised figure of 167,273. On a 12 month basis, job advertisements were 12.5% higher, a rise from September’s 12.3%.

(Readers may notice what appears to be a discrepancy between advertisement numbers in this article and the article published in October. ANZ state they have made certain changes to their survey which have changed the numbers but not the growth rates.)

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 October, the Inflation Gauge increased by 0.3%, which translates to 2.60% higher than a year ago. In September, the comparable figures were 0.3% and 2.5%.

Core measures of inflation, such as the Melbourne Institute’s version of the ABS “trimmed mean” measure, increased by 0.20% for the month or 2.7% on an annualised basis.

Last week, Suncorp announced it would be issuing $250 million worth of Suncorp Capital Notes 2 (ASX code: SUNPG). Suncorp has now announced the margin above BBSW for distribution payments on the new capital notes.

As has been the usual practice for hybrid issues in recent years, the margin on Suncorp’s latest hybrid has been set at the lower bound of the range. The indicative range was 3.65%-3.85% and hence the margin was set at 3.65%. When this margin is added to the current 3 month bank bill swap rate (BBSW) of 1.70%, investors can expect around 5.35% (annualised) for the first quarter and thereafter if BBSW rates do not alter materially. BBSW is typically at a fairly small margin to the RBA’s official cash rate which is currently 1.50%.

As at the close of business 30 October 2017.

$300 million of the $1 billion offer has already been allocated under the broker firm and institutional offers, even though the target amount to be raised was initially set at $250 million. Suncorp stated the final size of the offer will depend on the volume of applications it chose to accept under the re-investment offer. Suncorp warned re-investment applicants it may scale back applications as it sees fit.

The U.S unemployment rate has hit another new low for the period since February 2001. According to the U.S. Bureau of Labor Statistics, the U.S. economy gained 261,000 jobs in the non-farm sector in October while September’s figure was revised up from -33,000 to +18,000.  The market’s median expectation for employment growth in October was 310,000.

After revisions to previous months’ figures, the unemployment rate dropped from 4.2% to 4.1% as over 281,000 people either found work, retired or stopped looking for work. Average hourly pay was slightly lower than in September but still 2.4% higher than a year ago, although this rate was a sizable drop from September’s revised growth rate of 2.8%.

The total number of employed persons in the non-farm sector at the end of October was 147.0 million and 153.9 million overall. Over the past twelve months, 2.0 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. In September it jumped from August’s 60.1% to 60.4% but in October the ratio fell back to 60.2%, while the participation rate also slipped back from 63.1% to 62.7%.

Australians may be starting to care less about their appearances if the latest retail sales figures are anything to go on. During September, spending on recreational goods, toiletries, cosmetics and clothing was lower than in August. These categories experienced the single largest fall of the various retail categories.

Total retail sales (seasonally adjusted) remained unchanged after rounding in September, after falling by 0.5% (revised up from -0.6%) in August. On a year-on-year basis, sales grew by just 1.4%, down from the 2.1% annual rate recorded in August. September is the fifth month in a row where the growth rate has fallen.

The figures were short of the +0.4% increase expected and August’s revisions were too small to make an impact. The AUD dropped immediately from 77.15 U.S cents to 76.90 U.S cents while 3 year and 10 year bond yields also fell quickly. 3 year bonds ended the day down 7bps at 1.93% while 10 year bonds finished 8.5bps lower at 2.59%.

In a move which was widely anticipated, the Bank of England has announced it has raised its official rate by 0.25% to 0.50%. It is the first increase in Britain’s official interest rate since July 2007.

The Bank’s Monetary Policy Committee (MPC) determines the interest rate and it comprises nine members, of which four are external to the BoE. The MPC vote was 7-2 in favour of an increase in the U.K. official interest rate, known as “Bank Rate”.

According to the minutes of the meeting, unemployment is at “42-year low and the MPC judges that the level of remaining slack is limited.” However, there is a sting in the tail. The MPC expects GDP to grow “just above its reduced rate of potential.”

The BoE has consistently pointed to uncertainties surrounding Brexit and its negotiations since the 2016 vote and it repeated these concerns again in its statement. “There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”

The November meeting of the U.S. Fed’s Open Market Committee (FOMC) was expected to keep the federal funds rate range unchanged at 1.00% to 1.25% and to do little else. The decision to leave the rate “came and went with little fanfare” as Westpac economist Elliott Clarke put it as he said markets “had already priced in a December rate hike, and the result of this meeting did not argue against that view.”

ANZ Head of FX strategy, Daniel Been agreed. He said the statement which was released after the meeting flagged another rate rise from the Fed at its December meeting. “Overall, the statement is likely to be seen as providing the all clear for a rate hike next month, although the market was effectively all on board with that view anyway, with a hike around 80% priced ahead of today’s statement.”

Economists in general pointed to a subtle change of language in the statement. As Clarke noted, “The most salient change in the decision statement is arguably the upgrading of the growth view”. The Fed statement referred to economic activity as “rising at a solid rate despite hurricane-related disruptions” rather than the previous statement’s description of “rising moderately so far this year”.

One of the U.S. Fed’s favoured measures of inflation is core personal consumption expenditure (PCE). The core version of consumer spending strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It’s not the only measure of inflation used; the Fed also tracks the Consumer Price Index (CPI) and Producer Price Index (PPI) from the Department of Labor.

The latest PCE figures have been published by the Bureau of Economic Analysis as part of the September figures for personal income and expenditures report. At 0.1% for the month, core PCE inflation was in line with the market’s expectation. On an annual basis, it was steady at 1.3%. July’s comparable annual figure was 1.4% and June’s was 1.5%.