News

Leading investment bank Goldman Sachs has forecast Australia’s GDP to come in at a relatively slow 2.0% for 2016 and that the RBA will keep cash rates pegged at 2.00%. The predictions come ahead of the next Tuesday’s release of the government’s Mid-Year Economic Forecast, or MYEFO.

The bank said that the transition from mining boom to a more normal economy would run into headwinds throughout 2016 as weak demand and reduced stimulus from new housing investment weighed on the economy. “We expect that the RBA will leave interest rates on hold in 2016 and 2017 before commencing a modest interest-rate hiking cycle in early 2018” said Tim Toohey, Goldman’s chief economist.

Mr Toohey also warned that a deteriorating budget position, the possibility of a drought and falling mining investment would make 2016 a “pivotal year” for budget strategy and might provide an economic “incentive” to head to an early election.

Goldman’s is forecasting that MYEFO will show a $7 billion deterioration since May in the 2015-16 budget deficit to $42 billion.

Virgin Australia tapped it 8.50% November 2019 bonds a month ago, adding USD$100 million to the $300 million issued in November 2014. Now Citi’s credit analyst Anthony Ip thinks they are an attractive proposition for wholesale investors, as the bonds are the highest-yielding airline bonds available globally.

At an implied yield of 8.2% Ip thinks a more appropriate yield for the sub-investment grade bonds should be around 7.2%. He said Virgin’s balance sheet was improving and the 7.75% April 2021 bonds of Air Canada, another sub-investment grade issuer, are trading at a yield of around 6.7%.

While he thinks the airline is largely financially self-sufficient, a sale in the future of the all or part of the remaining 65% of its Velocity Frequent Flyer business would provide comfort to bond holders should cash flows decline. In 2014 it received $336 million for selling a 35 per cent stake to private equity house Affinity Equity Partners. Virgin Australia has a B+ credit rating from Standard & Poor’s and is rated B2 by Moody’s and its major shareholders are Air New Zealand, Etihad Airways, Singapore Airlines and the Virgin Group.

[whohit]Jobs growth harms case for 2016 rate cut[/whohit]

Last month Yield Report reported on October’s “jumbo“ labour force figures after a 58.6k rise in total employment, well in excess of expectations. The ABS has now released the November Labour Force figures and they came in at a seasonally adjusted +71.4k, again significantly higher than the market expectation of a 10k fall. Around 50k of the growth was in New South Wales.

The data is another set that questions the credibility of the ABS numbers with AMP’s Shane Oliver saying the number owed more to the sample rotation (ie a change in the sample of survey participants) and urged investors to treat the number with caution.

BT chief economist Chris Caton said of the results, “Yet another puzzling employment report, exhibiting strength that few are prepared to accept at face value. Nevertheless, it can’t be discounted completely. Until there is clear evidence to the contrary, the case for a further rate cut has evaporated.” Despite question marks over the numbers, employment does appear to be strengthening.

The local bond market saw an immediate jump in yields with 10 year yields rising from 2.83% to 2.88% before settling at 2.85%. Cash rate markets trimmed the odds of a rate cut in 2016 and now a rate reduction is seen as only a 40% chance at best through to November 2016. The Aussie dollar rose immediately by nearly US1 cent against the greenback as currency markets factored in higher future interest rates before easing back towards the close of trade.

The unemployment rate fell 0.1% to 5.8% while the participation rate rose 0.3% to 65.3%. The breakdown of the +71.4k jobs saw a rise of 41.7k full time jobs and an increase of 29.7k in part-time jobs. Total employment increased by 2.8% in the year to November while seasonally adjusted monthly hours worked in all jobs fell by 12.7m hours in October 2015 to 1,645.9m hours, or by approximately -0.8% for the month and +3.0% for the year.

The state with the lowest rates of unemployment was NSW (5.5%). Queensland takes over the number two spot with its unemployment rate dropping from 6.1% to 5.9%. Victoria’s figure is sure to raise eyebrows as it deteriorated badly from 5.6% to 6.2. W.A continued its recent poor form, with the state’s unemployment rate rising again, this time from 6.4% to 6.6%. The state with the highest unemployment rate remains South Australia with 7.3%, although its rate has come down for a second consecutive month.

Michael Workman, senior economist at Commonwealth Bank said, “The economy is restructuring and rebalancing, which involves ongoing highly publicised job losses. But there are also job gains underway. And they are advertised. That is why the job vacancies series have been rising steadily over the past year. The bond markets might not like it but there is solid jobs growth occurring and, most probably, the unemployment rate peaked in early 2015.”

ANZ’s Justin Fabo said, “Clearly the RBA will be happy with the improvement in labour market conditions, even after heavily discounting the recent strength in the official figures. Nevertheless, we stand by our call for 50bps of cash rate cuts next year.”

Westpac has quickly followed its recent UK issue of £375 million (AUD$777 million) worth of 7 year bonds with an issue into the European market worth €650 million (AUD$983 million). The issue was done at the equivalent of Swap + 65bps, less than the Swap + 105bps on the 7 year bonds issued the day before. Westpac last sold bonds into the European markets back in July although the €1.263 billion worth of bonds it sold were covered and therefore not comparable for pricing purposes with its latest issue.

Back in October, RBNZ governor Graeme Wheeler said some reduction in NZ’s official cash rate (OCR) was “likely” but as with any central banker he said such a move would “depend on the emerging flow of economic data”. The data has turned out to be supportive of such a reduction because the RBNZ moved to reduce the OCR by 0.25% to 2.50%. It said CPI inflation is below its 1.00%-3.00% target range, mainly as a result of the NZ currency strength and the lower global price of oil. Strong net immigration had increased the supply of labour and combined with the reduction in GDP growth through 2015, had increased spare capacity and unemployment. This was expected to be temporary as “a recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year.”  However in light of current and expected conditions, the Bank said “monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range.” This is the fourth reduction in New Zealand’s cash rate this year.

In a move which goes against the trend of other state debt issuers at present, the Western Australian Treasury Corporation (WATC) has decided to issue $250 million worth of a new line of floating rate notes. While the issue of floating rate securities by state government borrowing authorities is not unusual, it’s not a particularly common practice either. WATC last issued floating rate notes in early October and NSW’s TCorp issued some July 2020s at the beginning of April but generally most state government funding has been by way of fixed rate bonds.

The choice between fixed or floating may be dues to investor demand or it may simply be a balance sheet risk management activity. It is not necessarily seen as a call on where the interest rate market is headed.

The latest notes are to be issued at a margin of 3 month BBSW + 22bps and at the end of November, WATC was expecting to raise nearly $4.7 billion for the 2015 / 2016 year, of which nearly $4 billion relates to maturing bonds and notes. So far this financial year, WATC has raised $1.865 billion, including the proceeds from this latest issue.

The South Australian Financing Authority has issued, via tender, $250 million of its 20 November 2023 line which was first introduced in April 2014. The bonds were sold at a yield to maturity of 3.17% and the sale has come shortly after the release of the South Australian Government’s Mid-Year Budget Review which revised the 2015/2016 funding requirement down by half a billion dollars. The South Australian Government has now raised $1 billion of the $1.5 billion it is planning to raise for the financial year.

Following the release of the South Australian Mid-Year Budget Review, the South Australian Government has published its amended funding programme for the year to June 2016. It was previously expecting to require $4.2 billion to cover maturing bonds and government spending but the figure has been revised down to $3.7 billion on the back of a now-expected 2015/2016 budget surplus of $400 million. Previously, the budget papers had been expecting a deficit of approximately $100 million but in spite of lower royalties and taxation, the state now expects a greater share of GST revenue, additional grant funds from the Commonwealth Government for roads and a $400 million dividend from the Motor Accident Commission.

Click here for the full document.

International Finance Corporation (IFC), recently a regular issuer into the Kangaroo market, has tapped its February 2021 line for $150 million. The February 2021 line was introduced in late July when IFC issued $300 million worth at ACGB + 56.75bps. This financial year, IFC has sold bonds of various maturities in July, September and October.

Westpac Bank has priced £375million worth of 7 year bonds at gilts + 117bps, which equates to Swap + 105bps or BBSW + 147bps. The amount raised is equivalent to AUD$777 million and comes on top of the $150 million raised in the domestic market in previous week. While not unprecedented, it is somewhat unusual for Australian issuers to sell into the UK market.