Australian Bonds Rally on Weak Exports Figure, RBA Easing Expectations

Australian Bonds Rally on Weak Exports Figure, RBA Easing Expectations

28 April 2016, 08:32
Roberto Jacobs

Australian Bonds Rally on Weak Exports Figure, RBA Easing Expectations

The Australian bonds rallied on Thursday for two consecutive days after reading weaker-than-expected first quarter exports figure, which boosted investor’s expectation for further policy easing from Reserve bank of Australia (RBA) in its upcoming meeting. The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved lower 3.81 pct to 2.522 pct and the yield on the 2-year Treasury bond ticked down 4.09 pct to 1.877 pct by 0515 GMT.

The Australia Q1 export price index fell 4.7 pct q/q, market expectation was for a fall of 1.5 pct, from down5.4 pct. Similarly, import price index fell -3.0 pct q/q, market was anticipating a fall of 0.9 pct, from down 0.3 pct. Yesterday, the Australian Q1 Headline inflation tumbled 0.2 pct q/q, against market expectation of 0.2 pct q/q rise, from up 0.4 pct in the last quarter of 2015. Similarly, consumer prices rose 1.3 pct y/y in March, much lower than 1.8 pct expected and 1.7 pct observed in last quarter, which is lower than the RBA’s inflation target between 2-3 pct. This increases the possibilities for further Reserve Bank of Australia easing in the up-coming policy meeting.

We foresee that if Reserve Bank of Australia (RBA) wants to ease policy further, then inflation won’t be an issue going by the latest release today, which saw quite a pullback. However, it is unlikely for RBA, which has kept policy on hold, since last summer, will be very much eager to ease policy. Country’s real estate prices are still under upward pressure, due to foreign buying on weaker Aussie and domestic buying on lower interest rates.

Moreover, the United States Federal Reserve left policy rate unchanged in a 0.25-0.50% range, in line with market expectations. One key highlight of the statement was the removal of the note that inflation has picked up in recent months, something that was seen as a budding concern in the wake of the March statement. However, the statement noted that the Committee continues to closely monitor inflation indicators and global economic and financial developments (though seemingly treating these concerns with a milder degree of concern overall). Additionally, the statement continued to note that a range of recent indicators, including strong job gains, points to additional strengthening of the labor market (given a mildly upgraded assessment as it was previously described as growing at a moderate pace in March).

"The sentence concerning the risks posed by global growth and markets was removed, but a new note that they were monitoring them closely suggested they are not entirely convinced the risks have dissipated," ANZ economists said.

“The Fed's more hawkish tone ramped up the appetite for bonds and global rates markets traded in a tight range until after the FOMC meeting when yields dropped," said ANZ's economist in a note

Meanwhile, Australia's S&P/ASX 200 fell 0.13 pct to 5,197.5 by 0515 GMT.

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