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Warren Hogan was chief economist at Credit Suisse First Boston and he held senior economic positions with Westpac Banking Corporation and NSW Treasury Corporation. He is now ANZ’s chief economist and he sees some positives from the lowering of growth forecasts for the global economy.

He now expects global growth to be about 3.5% over the next two years, down from the previous forecast of 4% and with room for further downgrades. He lists still-sizable debt overhang, financial liberalisation in emerging markets and current account imbalances as potential causes of weakness in the economies around the world.

A large part of the reduction in ANZ‘s growth forecasts stems from China accounting for nearly one fifth of global GDP. For example, a 1% reduction in China’s expected growth rate would directly account for a 0.2% reduction in the global rate and that’s before any trade or investment effects which may flow to other countries.

ANZ’s Hogan thinks a lower level for growth for China and the world is actually a good thing. He said, “If Chinese authorities tried to resist such slowing it could lead to excessive leverage and asset bubbles. This would in turn be a threat to global economic and financial stability.”

Following investor meetings announced on 1 September 2015, QBE Insurance Group was expected to launch a benchmark 5-year fixed and floating rate note transaction. Initial pricing was being put at around BBSW/Swap + 400bps. So far $200m of floating rate notes with a non-call period of 5 years have been issued at the indicated price.

The last domestic transaction from QBE was believed to be back in 2000 when it issued a $150m 10y deal although a US$750m fixed rate issue with some similar features was sold in November 2014.

CLSA analyst Brian Johnson has suggested Westpac could be in the market for up to $5bn of equity when it announces its annual result in November. “Notwithstanding substantial capital raisings/business divestments by the Australian banks, we believe real CET1 (common equity tier one, the highest form of capital) ratios still look light with global bank capital intensity continuing to rise,” Mr Johnson said.

Westpac is believed to be sitting at the bottom of the CET1 capital holdings of the big four banks but has taken the opportunity at previous results announcements to alert the market to its intentions with regards to capital management.

In May this year Westpac raised $2bn of CET1 via its dividend reinvestment plan and August it raised $1.25bn of additional Tier 1 capital through a hybrid issue.

Standard & Poor’s downgraded Japan’s credit rating one notch to A+, a credit rating lower than Australia’s privately-owned major banks and corporations such as Apple. The agency said the likelihood of an economic recovery had diminished and the Japanese government’s strategy, dubbed “Abenomics” (after the country’s prime minister), will not be able to reverse the deterioration of the past five years. Japanese per capital income has slipped from US$47,000 to US$36,000 in the 2011 to 2014 period and Japan now joins other A+ rated countries such as Ireland, Israel and Slovakia.

The constituent companies for the iTraxx Series 24 have been announced. YieldReport readers will recall that the iTraxx credit default index is reviewed every March and September with a new series replacing the old. The Series 24 Australian iTraxx index has only one change – Asciano has been replaced by Goodman Funds Management. The new Series 24 index will begin trading on Monday 21 September and is likely to start at around 124 – a change of +12 (approx.) over Series 23. For a full explanation of the iTraxx index read What is iTraxx? 

iTRAXX AUSTRALIA Series 24

As part of his declaration in the parliament’s register of member’s interests, Australia’s new prime minister, Malcolm Turnbull, has declared an interest in several hybrid securities including one from an offshore issuer. In his 2013 declaration, entities associated with, or controlled by, the PM include euro-denominated Santos Finance Ltd subordinated notes, some Babcock & Brown (in liquidation) notes, Multiplex “SITES” and State Bank of India perpetual hybrids.

In the week before the September FOMC meeting, US cash rate markets were giving the odds of a rate increase at only 30%. On the other hand, the US bond market was consistently raising 10y and 30y bond rates in anticipation of a rate hike. Prior to the meeting Larry Summers, ex-Secretary of the Treasury said, “This is not the time for a tightening in monetary policy.”

In the end the Federal Reserve agreed with Summers and left official Fed rates unchanged.

Markets immediately reacted in a sudden burst of activity. US 10y bond rates dropped by 11bps to 2.19% and 30y rates dropped 8bps to 3.00%. Australian bond markets weren’t open at the time but the overnight bond futures markets indicated an 8bps drop in the 3y rate to 1.90% and an 11bps drop to 2.79% for the 10y rate.

Janet Yellen, the Federal Reserve chief said the first increase in rates for nearly a decade, would be appropriate after “some further improvement” in the labour market and when the committee is “confident” inflation is rising towards 2% in the medium term. It also appears offshore developments and China-inspired volatility, played a part in the Fed’s decision to defer the rise. “These developments may also restrain U.S. economic activity somewhat but have not led at this point to a significant change in the Committee’s outlook for the U.S. economy.” Shane Oliver of AMP Capital said this showed the Federal Reserve to be “conscious of global risks” and the resulting impact on the US.

BT took the view that the US central bank’s statements indicated there would still be a rate rise this year as did ANZ, who said they had expected a move in September but now expected December to be the earliest meeting for an increase. On the other hand, PIMCO said the statement “can best be characterised as a very dovish punt…no hike in September, no reason to think it will hike in December.” However, thirteen of seventeen FOMC members are forecasting a hike this year and the Fed Reserve’s own forecasts show an expected rate of 1.50% in late 2016, 2.50% in late 2017 and 3.50% in 2018.”

Eurostat released euro area August CPI figures which were largely in line with expectations despite a massive stimulus programme of bond buying. Increases in food, alcohol and tobacco prices offset energy price falls to produce annual CPI figure instead of 0.1%, down from July’s annual figure of 0.2%. Core annual August CPI rose 0.9%, down from the 0.8% recorded in July. ANZ said while activity data has improved, “tepid inflation” increases the likelihood of further ECB policy action.

The Westpac-Melbourne Institute leading index fell in August to -1.14%, from July’s reading of -0.40%. The index indicates the likely pace of economic activity 3-9 months in the future and while the first four months of 2015 indicated above trend growth was likely, the last four months showed a deterioration to the current index value -1.14%. Westpac chief economist, Bill Evans said, “Today’s print points to a likely ‘below trend’ start to next year.” An Australian economy growing at less than trend, currently seen as 3.0%, is in line with the chief economist’s view of the economy and his expectation of 2.7% growth in 2016, but this is at odds with the RBA’s 3.0% 2016 growth forecast. In any case he thinks the RBA won’t act on cash rates for some time. “At Westpac we do not expect any further rate movements before 2017.”

The US Labor Department released August CPI figures which were largely in line with expectations. Lower fuel prices offset higher food prices to produce a CPI figure of -0.1%, in line with the consensus figure. The year to date figure was 0.2%, the same as 0.2% comparable figure from June. Core inflation, which strips out the more volatile food and energy component, came in at 1.8% for the last 12 months, the same as July’s figure and in line with market expectations. ANZ said core inflation remained “relatively sticky”, pointing to a reduction in the US economy’s spare capacity offsetting the impact from the stronger USD and lower oil prices. This is the sixth month in a row year-on-year core inflation had seen a rise of 1.8%. US 10y bond rates finished the day marginally higher, up 1bps to 2.30%.