Australian Bonds Rally After World Bank Cuts Global Growth Outlook

Australian Bonds Rally After World Bank Cuts Global Growth Outlook

8 June 2016, 08:55
Roberto Jacobs

Australian Bonds Rally After World Bank Cuts Global Growth Outlook

The Australian government bonds gained on Wednesday as investors poured into safe-haven assets amid deepening global economic growth fears after the World Bank lowered its 2016 global growth forecast. Also, weak Chinese trade balance drove investors towards safe-haven buying.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price fell 4 basis points to 2.168 percent and  short-term 2-year bonds yield dipped 2-1/2 basis point to 1.657 percent by 05:40 GMT.

The World Bank lowered its 2016 global growth forecast to 2.4 percent from the earlier forecast of 2.9 percent in January due to stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows.

Chinese exports fell for the month of May, worse than markets had anticipated on slowed demand for Chinese products in the overseas market. Imports, however, improved beyond market anticipation. Exports fell 4.1 percent last month in dollar terms from the same period a year ago to USD181.1 billion following a 1.8 percent decline in April and leaving a trade surplus of just under $50 billion, the figures showed. Meanwhile, imports fell 0.4 percent in May, a sharp improvement from -10.9 percent in the previous month, data released showed Wednesday.

Moreover, China’s imports have been shrinking quite at a fast pace since late 2014 as the economy is facing contraction pressures, buoyed by a slowdown in manufacturing capacity, a slowing housing market and increasing debt burden. The world’s second-largest economy remains a key driver of global growth and a major source of demand for countries like Australia and Nigeria. Trade surplus came in at USD 49.98 billion in May, missing estimates for USD 55.7 billion.

Yesterday, the Reserve Bank of Australia (RBA) maintained its key interest rate at a record low of 1.75%, as expected. Governor Stevens in his monetary policy statement concluded that the Australian economy continued to grow, but at a lower than average pace. He added that unchanged policy is consistent with CPI returning to target band and the global economy is also growing at lower than average pace. Said dwelling prices have begun to rise again recently and he sees inflation remaining quite low for some time. He further mentioned that several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. He said China's growth rate has continued to moderate, though recent actions by Chinese policymakers are supporting the near-term outlook.

We foresee that the CB is unlikely to ease while keeping the cash rate at its all-time low of 1.75% until it gets another read on inflation in late July.

On Monday, the Federal Reserve Chair Janet Yellen said that if incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. Referring to the weaker than expected May employment report, Yellen noted that she sees good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.

As a result, she expects the economic expansion to continue, with the labor market improving further and GDP growing moderately. This appears to be a solid attempt to prevent the May employment report from derailing efforts to prepare markets for a summer rate hike. With Lockhart and Bullard going a long way in talking down a June hike, but keeping open support for possibly one in July, we expect a good deal of support for normalization to resume, remembering that it is not about the incoming data itself but more how the Fed takes it into account.

Following this, the AUD/USD pair climbed to 1-month high at 0.7460 during early morning trades Wednesday, following upbeat trade surplus at 5:25AM GMT. Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading up 0.12 percent, or 6.5 points, at 5,368.5 by 05:40 GMT.

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