June retail sales were released last week, showing strong growth of 0.7% (s.a.) and beating consensus expectations of a 0.4% rise comfortably. This compared with May’s 0.4% rise while year on year figures were 4.9%. Household goods retailing was the largest contributor to the increase, adding 2.2% month-on-month. Online sales now account for 3.3% of total retail spending.
Federal Reserve Bank of Atlanta president Dennis Lockhart said the US is ready to start raising official interest rates and it would take a “significant deterioration” in data to delay a September rate rise. “I think there is a high bar right now to not acting, speaking for myself.” In April he had said he did not want to see “regression” in the economy but now he thinks the US is “not losing ground…the economy is performing at quite a satisfactory level.” He then went on to say the Fed should “put significant weight on the accumulated progress we have seen quite literally over a number of years…I won’t be overly influenced by just the latest thing I’ve heard on the economy.” Lockhart is seen as being in the middle of Federal Reserve opinions and therefore his views are being seen as significant. US Treasurys rose 6bps on the day.
ANZ-Roy Morgan Consumer Confidence rose 0.4% to 112.9 this week which, readers will see from the chart below, is the long term average. However, consumer confidence is fragile and easily moved, even by events far away. ANZ’s Warren Hogan said, “ANZ-Roy Morgan Consumer Confidence is stable this week but still below the levels seen in early July just prior to the problems in Greece and China’s stock market rout. The recent bounce suggests the loss of confidence in July was attributable to these offshore events.” The survey pointed to a slightly unusual phenomenon whereby consumer expectations of economic conditions in the next 5 years hit record low several weeks back but their individual finances were at the highest levels in the history of the survey.
The annual rate of inflation is staying well below the Reserve Bank’s 2% to 3% target, weighed down by falls in utility prices according to the TD Securities – Melbourne Institute Inflation Gauge. The Gauge rose 0.2% in July (v 0.1% in June) with the annual rate 1.6%. According to Annette Beacher, Chief Asia-Pac Macro Strategist at TD Securities “Our TD-MI Inflation Gauge accurately predicted the turnaround in tradable inflation in the June quarter and this July reading suggests further upward momentum is in train. The fall in utility prices in July was the result of a state government rebate, and is a one-off. Otherwise, inflation remains well contained, although annual rates may have found a trough. Cautious optimism from the RBA Governor in recent weeks speaks to us that the RBA Board is likely to leave the cash rate at 2% for quite some time”. The underlying inflation rate rose 0.1% to 1.5% year-on-year.
Charter Hall Retail REIT was assigned a Baa1/stable credit rating late last month and Commonwealth Banks thinks this will see a debut from the trust in the Australian corporate bond market. While it is just speculation at the moment, typically a corporate paying for a credit rating will only do so with a debt capital raising in mind.
The US Commerce Department released U.S. GDP figures estimates for the second quarter which showed an annual growth rate of 2.3%, lower than the consensus estimate of 2.7%. However, first quarter GDP was revised up to 0.6% for the quarter in contrast to the previous estimate of -0.2%. The US currency reacted by strengthening, usually a sign the currency markets think higher US rates are more likely, although the bond market reacted differently with Treasurys falling on the day.
ANZ said the figures were “solid” even though the headline number was less than expected and “underlying details were better”. Overall the numbers supported the FOMC’s upbeat tone from earlier in the week and the US central bank is “on course to hike with data still tracking in the right direction.”
After a May investor roads how by SABMiller, FBG Treasury, the old Foster’s and now local subsidiary of the global brewer, announced the issue of $700m August 2020 fixed rate notes as part of a $3bn programme. The notes were issued at BBSW + 128bps to yield 3.7625% and the pricing was 7bps less than was initial guidance, suggesting demand was strong. Around 85% of the issue went to domestic institutions. The notes have been rated A-/A3 and will be guaranteed by the parent.
Bill Gross was again in the spotlight last week, saying US rates at zero were now the problem and not the cure for the post GFC economy. He said the Federal Reserve is beginning to recognise “zero interest rates increasingly have negative, as well as positive consequences.” He thinks the US Federal Reserve and the BoE are “wising up…the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history” and that’s why the US will get a rate rise shortly. “There is no statistical reason per se for the Fed to raise interest rates, yet absent a major global catastrophe we are likely to get one in September.”
In a Bloomberg survey late last week, 25 out of 28 economists polled don’t think the RBA will cut rates at its next meeting. The current rate stands at 2.00%, the lowest official cash rate in Australian history. The 3 dissenting economists think the RBA will move the rate down to 1.75%.
In a speech to the Australian Securitisation Forum, the head of the AOFM, Rob Nicholls, spoke about the divestment of Residential Mortgage Backed Securities that the AOFM acquired after the GFC in order to provide liquidity to the market.
To date there has been two auctions, both of which have seen only a small amount of bonds acquired. The market has been speculating on whether the AOFM has been a “fussy seller” or whether the market is uninterested in the securities or simply fishing for a bargain from a keen seller. There has also been conjecture regarding the sales process itself and what the AOFM will do should the auctions yield unsatisfactory results. Mr Nicholls addressed some of those concerns in his speech and it was clear that the AOFM is a ‘fussy seller’ that is seeking to maximise the returns to taxpayers with minimum disruption to the market.
He went on to say that:
Mr Nicholls said that, subject to market conditions, the portfolio could be expected to be divested by the middle of 2016 but wanted to stress the portfolio had to be completely liquidated by a certain date.
The third RMBS auction will be held on 18 August and the fourth auction will be held on 15 September.