News

Forbes magazine and its guest writer, economist Steven Keen, published an article just a few days ago saying Australia will go into recession, most probably by 2017.

The premise of the article is private credit in Australia has been growing in excess of GDP growth and it will drop back in a form of mean reversion, reducing aggregate demand and thus producing a recession.

Perhaps the timing was coincidental but it just so happens private sector credit figures for February have now been released by the RBA. Private sector credit grew by 0.6% in February, up from January’s figure of 0.5% and a tad higher than the 0.5% expected by the market. The year-to-February number was 6.6%, also up from January’s 6.5%.

For those readers interested in the relationship between private sector credit and GDP, a chart showing both over the last three decades is shown below.

The Australian dollar rallied strongly overnight as Janet Yellen again hinted that the US Fed may not be so quick to raise interest rates as markets had been predicting at the start of the year. Yellen said, with regard to raising rates, that the Fed should proceed only “cautiously” as “inflation has not yet proven durable against a backdrop of looming global risks to the US economy, including still-low oil prices and China.”

The Fed is walking a fine line between wanting to sound tough on inflation yet being very worried about being left with a rising currency as other central banks continue to devalue. A too-strong US dollar might kill off a growing economy yet the Fed is also aware that if inflation starts to rise too quickly the risks to the domestic economy may be quite large.

The AUD rose over 1% to US$0.7645.

Resimac has authorised National Australia Bank and Citi to arrange a series of investor meetings in Australia on its behalf. Investor meetings are usually a prelude to a transaction and in this case RMBS are expected to be issued. Resimac’s last RMBS issue was in September 2015 when it issued $500 million worth of RMBS in four tranches. The largest “Class A” tranche was worth $450 million and was issued at BBSW + 100bps.

YieldReport has previously commented about how bonds issues from unrated corporates are not particularly common. The last unrated bond issue was a $50 million raising by Impact Homes and that occurred two months ago. Given the number of bond issues going on in Australia and around the globe, two months seems a long time between drinks.

IMF Bentham has no credit rating but it plans to break the drought with a June 2020, 7.40% secured corporate note issue. The litigation funder is seeking to raise $30 million with room for an additional $20 million should investor demand be present. According to the company, the incentive to issue corporate notes relates to the diversification of its funding sources while simultaneously lengthening its debt maturity profile.

The notes to be issued will have some slightly unusual features. They are callable in June 2019 at $101.00 and feature a 100bps step-up interest penalty for the period of time should shareholders equity fall below $100 million. There’s also an investor put option should a change of control event occur or if IMF’s existing ASX-listed bonds (ASX code: IMFHA) are suspended. The bonds themselves will not be listed.

FIIG Securities is the lead manager.

Amid the parade of US Fed officials giving speeches about the likely timing of the next US official interest rate rise, one of the few important pieces of data to be released in what is otherwise a quiet time for economic data is the US private consumer expenditure numbers (PCE) for February. Core PCE, which strips out energy and food components, is the US Fed’s preferred measure of inflation and the latest release had core PCE steady at 1.7% for the last 12 months and 0.1% higher than a month ago. In both case, the numbers were less than expected; 1.8% was the expected number for the year and 0.2% was expected for the month. US ten year bonds finished the day 2bps lower at 1.88%.

Whereas last month’s PCE numbers added weight to expectations of official rate rises in the US, the latest batch of data has had a dampening effect. Westpac described the core PCE measure as “slightly disappointing” while ANZ said, “This is still above the Fed’s 1.6% forecast for the final quarter of this year, however, the fact that it undershot expectations could keep the debate about whether the recent lift in core inflation will be sustained alive.” CBA said, “After last night’s PCE deflator printing below expectations at 1.7% y/y there might indeed be a lessened sense of urgency at the FOMC.”

Vicinity Centres, formerly known as Centro Property Group and then Federation Centres, has issued £350 million (AUD$650 million) 10 year fixed rate bonds in its first ever issue into the European market. Vicinity said the deal allowed for a diversification in their funding while extending the average maturity of their outstanding debt. The proceeds will be swapped into Australian dollars and be used to retire bank debt. The bonds were sold at UK government bonds (Gilts) + 197bps.

Hot on the heels of ANZ’s chief economist leaving the bank in early March, the bank has wasted little time in ditching its call for two more interest rate cuts from the Reserve Bank. The original call was made on 1 October 2015 by the then chief economist Warren Hogan as Australia’s economy was looking shaky and unemployment was moving higher.

The bank now says that the economy is on a firmer footing and the risks around the global outlook are dissipating making further rate cuts unlikely. The bank now says the RBA will keep rates steady for 2016 and most likely 2017 as well.

QTC has announced what they referred to as a “material change” in its outstanding benchmark series. After receiving a reverse enquiry from a large institutional investor, QTC bought back $500 million September 2017s and $500 million September 2018 bonds and issued $1 billion worth of bonds comprising $650 million July 2022s and $350 million July 2023s. The institution was clearly seeking to extend duration in their portfolio and QTC was happy to oblige. QTC had already bought back $463million worth of the September 2017s earlier in the month so the state financing body seems to be willing buyer. The investor who instigated the deal would be happy to have the deal facilitated by QTC in market where liquidity has become a limiting factor in recent years. Seems like a rare example of a win-win.

CBA reviewed RBA Governor Glenn Stevens’ recent speech and the Q&A segment which followed at the latest ASIC annual forum and it thinks he may pushing for markets to be less pessimistic about the state of the Australian economy. As part of their daily research notes, CBA described his speech as a “lament” of how economic commentators seem to be “locked into looking for downside risks as an overhang of the GFC.” The bank thinks his speech and his response to questions are not those of a man looking to cut rates. “That [Stevens’ comments] doesn’t sound to us like a man contemplating a surprise rate cut in April to get in ahead of the Budget on May 3”. Stevens had said the local economy was improving and Australia had the capacity to negotiate “whatever lies ahead.”

In light of what the US Treasury and its representative on the IMF Executive Board had to say about currency manipulation, observers were interested in how RBA chief Glenn Stevens would react to questions after his speech at the recent ASIC Annual Forum 2016. His speech itself covered the topics one would expect; China, negative interest rates, financial markets, budget deficits and the like. It was during the Q&A segment which followed his speech that Stevens directly rebutted the US Treasury’s implied criticism of his and other RBA officials’ comments on the exchange rate. When asked if his commenting on whether the AUD was over-valued or under-valued was consistent with a commitment to a freely floating exchange rate, Stevens said, “Yes, absolutely.”

However, the main part of Steven’s appearance was the deliverance of his speech which, while quite dry in it content, contained some illuminating points.

Stevens on:

The budget deficit: “…the deeper, and more profound, fact that the budget is structurally in deficit, for reasons largely unrelated to the commodity price decline. “

The global economy: “The point here is not so much that growth is that weak: it is forecast to be higher than it was in the relatively mild global slowdown in the early 2000s, for example, and nothing like as weak as 2009.”

The Chinese economy’s transition: “The truth is that we can’t know how all this will turn out.”

Low yields: “The Bank for International Settlements has calculated that about USD$6.5 trillion in sovereign bonds, or about one-quarter of the JPMorgan government bond index according to one report, are now trading at negative yields in global capital markets. “

High yields: “But spreads for lesser rated sovereign and private debt have widened, in some cases quite significantly.”

Bond market liquidity: “It has to be acknowledged that bond markets are less liquid than they used to be. This is partly because the major international banks now do not commit the same size of balance sheet to market-making activities – and that stems, in part, from regulation.”

The Australian economy: “So at the turn of the year the Australian economy seemed to have been picking up.”

Australian policy responses available: “Even with interest rates at already low levels, and public debt higher than it was, there would, in the event of a serious economic downturn, be more room to ease both monetary and fiscal policy than in many, indeed most, other countries.”

Australian banks: “So their ability to handle either a funding market shock or an economic downturn has improved compared with the situation in 2008. At this stage we do not see a material problem in Australian financial or non-financial entities accessing capital markets.”

For a full text of the full speech and Q&A click here