Australian Bonds Rise Modestly on Dovish Outlook
The Australian government bonds were trading modestly firmer on Tuesday as investors were cautious with global markets uncertainty and weak inflation outlook. Also, bonds are higher with global markets uncertain about the US economic outlook. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 4 bps to 2.290 pct and the yield on the 2-year Treasury bond stood flat at 1.592 pct by 0500 GMT.
The Australian dollar sank majorly after the central bank slashed its inflation and GDP forecasts. The Reserve Bank of Australia in its quarterly statement on Monetary Policy concluded that the May policy easing was based on lower weak inflation outlook, supported by cooling housing sector. Said cuts in inflation and Gross Domestic Product (GDP) forecasts are mostly unchanged, year average for 2016 revised up 0.5 ppt. Said underlying inflation seen at 1-2 pct towards the end 2016, from previous forecast of 2-3 pct, 1.5-2.5 pct out to mid-2018, from previous 2-3 pct. They further added that GDP seen at 2.5-3.5 pct end 2016 out to end 2017, 3-4 pct to mid-2018 and Consumer Price Index (CPI) data showed broad-based weakness in domestic cost pressures, slow growth in labour costs, outlook for wage growth revised lower, to stay low for longer and then rise very gradually. RBA also cites that retail competition, softer inflation in rental & home building, falling fuel & utility costs and inflation expectations in Australia below average, but have not declined as much as elsewhere. Said outlook for domestic cost pressures, impact of AUD on inflation are key uncertainties and unemployment seen around current rate to mid-2017, before declining gradually. Furthermore, Q1 GDP growth seen around same moderate pace as previous quarter and household consumption to be a bit above average, net exports will continue to add to GDP and outlook assumes recent rises in bulk commodity prices are not sustained. Most of decline in mining investment to be over by end 2016, non-mining still subdued, they added.
“Bond yields were modestly lower in major markets overnight on the back of downgraded market expectations of a US Federal Reserve rate rise this year, with Australian yields falling in line,” said ANZ economists in a research note on Tuesday.
The Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of Australia's target. Today, crude oil prices as output threat due to Canadian wildfire eases along with reviving concerns of a growing supply glut. Crude oil prices came under more pressure after private information forecaster Genscape Inc. said stock at key U.S. delivery hub in Cushing, Okla. jumped 1.4 million barrels. Investigators studied by Platts gauge U.S. rough stocks to have expanded 300,000 barrels in the most recent week. The International benchmark Brent futures fell to $43.82, from $46.19 in the earlier session and West Texas Intermediate (WTI) dipped to $43.39, as compared to $45.22 in the previous session.
Meanwhile, Australia's S&P/ASX 200 rose 0.52 pct to 5,325.5 by 0535 GMT.