News

NAB may be reversing its price leadership strategy in retail banking. After the RBA cut the cash rate by 25bps in May, NAB cut its standard variable rate by only 20bps, thereby edging closer to its peers in the mortgage market. Its subsidiary, UBank, whose rates stand out in the market for deposits, also looks as if its rates are coming back closer to other ADIs. According to Macquarie Securities, the consequence of UBank widening its margins have been a drop in UBank’s market share but with an overall increase in profitability.

Moody’s has raised Suncorp-Metway’s baseline credit assessment to baa1 from baa2 and affirmed all the other credit ratings of the Suncorp Group Limited subsidiary. The outlook for all ratings is stable. Moody’s says the decision is based on Suncorp’s stronger balance sheet, which is the result of fewer non-performing loans, higher capital levels and less reliance on wholesale funding.

Two speeches by senior members of the RBA suggest there is some disagreement as to whether further decreases in the cash rate will have any real effect on the Australian economy.
Assistant governor Chris Kent is not convinced monetary policy has lost its punch but more tellingly governor Glenn Stevens holds the view that the average household is unwillingly to take on more debt and any further cuts will be ineffective. ANZ bank argues the motivation for households is the desire to actually cut household debt levels and the evidence for this in in the high saving rate shown across all age groups. ANZ argued households’ current propensity to save or at least not go further into debt is the reason behind the lack of effect from lowering the cash rate.

PIMCO, one of the world’s leading bond fund managers, has suggested investors begin to think about protecting themselves from a sharp rise in inflation by buying inflation linked bonds. ILBs are bonds where the capital amount is adjusted quarterly for inflation. Mihir Worah, of PIMCO, said in a research note last week that many investors are still thinking about deflation and perhaps haven’t factored in a possible inflation spike. The returns on fixed rate bonds are eaten away when inflation rises and PIMCO forecasts that US inflation will rise to 2.00% in coming years, in line with central bank’s forecasts. It was, if anything, “likely to overshoot that” he said. The most recent ILB tender in Australia (23 June) saw investors buy ILBs at 3.8bps above the inflation rate suggesting they were happy to lock in returns that were only a modest amount above the inflation rate.

US consumer spending rose 0.9% in May beating expectations of 0.7%. April figures were revised up from 0.0% to 0.1% as well. In the first five months of calendar 2015, incomes rose 1.7%. The figures suggest weakness in the first quarter was an aberration and add to views that the US economy is improving and rates will rise this year.

US Federal Reserve governor Jerome Powell was interviewed on 23 June and said the chances of the central bank raising rates were “50/50” and “potentially as soon as September” if US economy performs in line with his expectations.

Paul Bloxham, HSBC’s chief economist in Australia has cut his forecast for Australian growth by 0.2% to 2.4% in 2015. The downgrade was driven by lack of business investment in Australia and lower Chinese economic growth that will affect the demand for raw materials supplied by Australia. As a consequence, he now sees the RBA keeping cash rates on hold for all of 2016, removing his forecasts for rate hikes in the second-half of next year.

The AOFM conducted its first auction (in this auction series) of RMBS that were acquired after the GFC. In all, bids were received for around $1.7bn but the AOFM only accepted $226m in original face value terms. This was deemed a “fizzer” by the Financial Review but others saw it as the AOFM being a disciplined seller. The second auction of three will take place on 14 July.

Local councils that invested in supposedly secure collateralised debt obligations prior to the GFC and saw them implode when credit markets collapsed, have reached settlements with the administrators of Oakvale Treasury – one of the companies that sold them. The settlements are confidential but some light is being shed on them as councils update their financial accounts. Oakvale along with Lehman Brothers were active sellers of CDOs largely on the basis of supportive credit ratings and high yields. This turned out to be a false premise as the assets at the heart of the some CDOs turned sour when the US housing bubble collapsed in 2007/2008.

The South Australian budget was handed down with the budget projected to return to a $43m surplus in 2015/16, rising to $961m by 2018/19. There were no new savings measures and major tax cuts on business transactions worth $670m would stimulate growth and create jobs. Michael O’Neill, an economist from Adelaide University, said the forecasts were unlikely to be achieved and were overly optimistic.