News

July data for China’s retail sales, industrial production and fixed investment were released and all three indicators were lower than forecast. Credit Agricole said the lower-than-expected data was the result of the recent equity market crash which flowed through to lower consumer spending while government-directed equity buying had diverted bank lending away from the real economy. ANZ said if conditions do not improve in the coming months, growth could fall below 6.5% in the September quarter. The latest sets of data comes on top of soft trade figures recently published that showed exports and imports both slumping.

The new 1.25% 21 August 2040 Treasury Indexed Bond has been priced. The $1.25bn issue kicked off a big week of ACGB issuance with several large tenders set to be held. Index bonds have the capital amount adjusted each quarter by the level of the CPI thus protecting investor’s capital from inflation. When bidding for index bonds, investors bid the yield that they will receive above inflation, the ‘real yield’. The new indexed bonds went at a real yield of 1.245% which is materially higher than the 0.58% real yield on the 2035 indexed bonds issued in April this year. Readers will recall the mid-April tender of 2018 indexed bonds which were auctioned at a real yield of -0.0763%. This was the first time in Australia that investors had bid for index bonds and locked in a return below the level of inflation. April was the height of global concern about deflation and a period when a large percentage of bonds in Europe were trading at negative yields.

Business confidence has eased according to NAB’s July survey, with the index falling to 4 from its previously recorded figure of 8. As part of the survey, NAB also measures business conditions and this index also fell 4 points to 6. NAB said much of the change in confidence came from mining and constructions firms and could be linked to growing concerns about China. NAB’s chief economist Alan Oster said, “While confidence eased in most industries, much of the change stemmed from mining and construction firms.” He continued by saying the trend indicates a “tightening of spare capacity which bodes well for non-mining investment and the labour market.”  Labour costs rose 0.2% and purchase costs rose 0.8% while retail prices rose 0.7%, all broadly in line with official figures.

AGL announced a higher than expected increase in underlying profit for the 2014/2015 year although the headline figure was lower than expected due to one-off charges. The company said it has targeted $1bn of asset sales by June 2017 and plans $200m of cost cutting for 2015/16. AGL has $600m of subordinated notes listed on the ASX and has been an issuer of notes in both the domestic and US markets.

Greece has finalised a deal with its EU/ECB/IMF creditors in the wake of June and July’s missed debt payments and bank funding crisis. The deal package contains approximately €86bn in new loans in return for the Greek government agreeing to various fiscal measures for the years 2015 through to 2018. The deal will still need to be ratified by the Greek parliament and this is likely to be required by 20 August, when an ECB debt payment is due and the news loans will provide the funding for the repayment.

US Federal Reserve vice chairman Stanley Fisher, said that US inflation was “very low” but that it was only temporary. “A large part of the current inflation is temporary. It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials,” he said on Bloomberg TV. “These are things which will stabilise at some point.” He also said that the US economy was near “full employment” in a further sign the US Fed is ready to raise interest rates when it next meets in October. The latest jobs data showed US unemployment at 5.3%, a 7 year low.

On Wednesday 12 August, CBA announces its full year results and the market will be watching closely to see whether the bank announces any new capital raising initiatives. Estimates are that CBA needs around $7bn of new tier 1 capital. ANZ’s announcement last week that it would raise $3bn of fresh equity capital led to sharp equity markets falls. Investors saw it as the first of numerous upcoming bank capital raisings that would dilute existing shareholders but ultimately make banks safer. The mantra seemed to be ‘better to sell bank shares now and buy again when the new issues hit the market.’ ANZ CEO Mike Smith said the bank moved because APRA, the bank regulator, had moved quicker than expected.

In mid-July APRA flagged that it was adjusting the risk weighting model for residential mortgages and that the big four banks plus Macquarie would be required to hold more capital against those mortgages. The new weightings would take effect on 1 July 2016 and this was seen as a short time frame for banks to raise new capital. Banks have a range of ways to meet the new weightings but markets are mostly focusing on banks issuing straight equity or using their existing dividend reinvestment plans to effectively convert their dividend payouts back into equity.

The amount of capital likely to be raised is the subject of much conjecture and range between $12bn and $30bn. The various bank analysts use individual pricing/analytical models to assess this, hence the conjecture. One such analysis of CBA’s capital profile was published by Credit Suisse and is attached below.

CBA Capital Adequacy ($m)

Source: Credit Suisse

RBA Statement on Monetary Policy August 2015

• GDP growth in 2016 now expected to average 2.5% (prev. 3.0%)
• Unemployment to remain at or near current levels for 18 months
• Inflation forecast to be slightly higher for 2016/2017 (2.5% at end of 2016 from 2.25%)

The RBA’s quarterly statement of monetary policy was released on 7 August and its mood was generally positive despite some downgrades to growth forecasts. The main points were:

• The Australian economy has “continued to grow at a moderate pace over the past year” despite structural change – largely the ending of the mining boom and the significant fall in commodity prices.
• Although June growth slowed from the March quarters, a number of indicators, such as labour force figure and non-mining business conditions, are more positive. Indeed, business conditions are “above average”.
• Growth amongst Australia’s trading partners is expected to be near the long-term average for the financial years 2015 and 2016. The figures have been revised down a little since the May SoMP and are the result of weaker numbers from East Asia – mainly China.
• Underlying inflation was around 0.5% in the June quarter and 2.25% over the year. Forecasts have been revised up a little because of the lower Australian dollar while domestic cost pressures are expected to remain “well contained”. Forecast underlying inflation is expected to be around 2.5%.
• Spare capacity remains but labour market conditions are better than expected some months ago. Lower population growth due to lower net immigration and low wages growth has helped stop unemployment rising further. Unemployment is forecast to stay around current levels for the next 18 months before declining in 2017. Previously the RBA had forecast unemployment to peak at 6.5% in late 2015/early 2016.

GDP growth is currently below average but is “expected to be between 2 and 3%” for 2016 and “over 3% for the year to June 2017.” The forecasts are based on current interest rates futures, the same exchange rates as now, oil prices remaining stable, lower population growth than in the past, a lower household savings ratio, weaker investment (both non-mining and mining) and stronger volume-driven exports and a lower level of imports.

Market reaction to the SoMP is that the RBA will not need to cut rates in the short term because they are still waiting on the effects of the rate cuts earlier this year to flow through. ANZ’s Warren Hogan said the RBA would not act in the short term as the AUD was weakening as hoped and would continue to do without lowering rates further. The RBA “are reasonably confident that the US Fed will raise rates in the next few months” which would tend to put downward pressure on the exchange rate. The expectation of a cash rate cut by the market moved swiftly from being priced as an 85% chance to a 55% chance.

Aurizon, the rail freight operator originally known as Queensland Rail, will be holding a series of investor briefings to update holders of its Australian denominated debt. Aurizon’s stated objective is to diversify its debt investor base and lengthen it maturity profile while maintaining its credit ratings. The BBB+/Baa1 issuer’s last foray into the debt markets was with a 10y 2.00% euro note in September 2014 and nearly a year before that, it sold 7y 5.75% euro notes in October 2013.

US employers added 215k jobs in June, slightly below markets estimates of 223k, according to the US Labor Department. Unemployment held steady at 5.3%, a 7 year low. There were 14k of upward revisions to the previous two months jobs data. The jobs growth was broadly based and confirms that nearly 3m jobs were added in the past 12 months. This was seen as enough by traders for the Fed to begin to raise US interest rates with the market now firming towards September as the first hike. Similar jobs data in August would all but confirm it. Last week we saw Atlanta Fed president Dennis Lockhart say the economy is ready for the first interest rate increase in 9 years and it would take a ‘significant deterioration’ in data to convince him not to move in September. Mr Lockhart is seen by markets as a ‘centrist’ in the ongoing debate between the ‘hawks’ and the ‘doves’ so his views have been viewed with more weight than usual.