Last week’s monthly CPI data confirmed what we have been saying for some time and that is that the inflation dragon is a long way from dead in Australia and/or the inflation genie is still out of the bottle and about to destroy the village. This forced the last of the major banks ANZ, Westpac, NAB and CBA to shift their forecasts for a rate cut from February to May.
The October monthly CPI showed headline CPI steady at 2.1% pa and the more important trimmed mean inflation reading rising from 3.2% to 3.5%. The headline CPI reading was again impacted by the electricity subsidies with a further 12.3% month on month drop in electricity prices keeping downward pressure on the level of the headline CPI, which declined 0.3% month on month. We have seen how the CPI bounces straight back from these electricity subsidies ceasing when the Tasmania subsidy expired soon after the election this year and the CPI jumped higher in May.
The RBA minutes released the week before were decidedly more hawkish than that we have seen for some time. It is clear that the RBA is not going to be rushed into cutting rates because of the impact of the electricity subsidies but is going to look at the readings over the March quarter when the WA and QLD large subsidies have expired before acting. We must remember that with unemployment still well below the 4.75% estimate of full employment the RBA is under no pressure to act early and cut rates.
Our view is that by March with the electricity subsidies exhausted we will be seeing rising headline inflation, and the RBA turn even more hawkish.
Interest Rates
It was hard to see the basis for the rally in US bonds last week as the economic data was inconclusive for the US, however, perhaps it was the rise in geopolitical risk that triggered a shift back into fixed rate bonds and out of floating rate credit. Chief among these was the potential for the French government to collapse with the blocking of its budget and a new round of elections. There is also the ongoing ‘Bessent effect’ supporting treasuries.
The Aust Bank economists are now all predicting a rate cut from the RBA in May – tomorrow it will be August and then?
Semi-govt spreads over Cwlth Treasuries widened by 4bps last week with the focus shifting back onto Vic, NSW, and QLD budget deficits, after S&P placed NSW on ratings watch negative and Fitch issued a warning that State based spending was putting the Australian AAA sovereign rating at risk.
Major Credit Markets
US investment grade (IG) markets remain strong on hopes for strong U.S. growth, markets watching “Black Friday” spending and the effect on retailers’ sales and profits. Investors are still focusing on “total yield” (treasuries plus spreads) however this concept may be under pressure with treasury yields falling. A move in the 10-year treasury below 4% could see a re-focus on the absolute levels of margins.
The return of kangaroo Tier 2 issuers to the Australian market appears to be weighing on the market now. Barclays last week issued the largest Kangaroo Tier 2 in 10 years and last week the $1bn BNP Paribas Tier 2 – that was four times oversubscribed – trading about 20 bps weaker in the grey market from its 200bp issue level. In the quiet Friday trading it appeared well supported in the 2015-2020 range, but it may be impacted this week by the outcome of the French Budget issue.
High Yield Markets
US high yield (HY) markets were steady in a quiet week with the Thanksgiving holiday. Spreads remain tight with no evidence of risks rising.
Hybrid margins fell strongly over the week with the average major bank hybrid margin contracting by a large 0.12% to close at 1.95%. This level is right in the middle of the 6-month trading range which has ranged from 1.80% to 2.10%. Hybrid margins have been volatile in past weeks as the market waits for APRA’s view on hybrid issuance going forward. Volumes were lighter last week compared to the week before, however still above average daily levels for 2024. Short-term hybrids were especially in demand with the March 2025 AN3PH and April 2025 CBAPG leading the turnover. We examine curve moves on the next page.
Listed Hybrid Market
Hybrids: curve games
As mentioned above, hybrid margins have been volatile in November. The chart below shows the move in the curve over the past 2 weeks. The larger blue dots, the blue curve (solid line) and hybrid labels are the latest data points. The red dots are from November 15 and the green dots the week in the middle, November 22. From November 15th to the 22nd, the curve moved from tight to wide with an overall similar shape, just higher. However, in the past week, the curve has moved down but individual hybrids are quite dispersed. This indicates that the contraction move has not yet completed – the market yet to equilibrate securities appropriately for relative margin. A few look misplaced and wide, in particular AN3PJ and AN3PK. In contrast, CBAPI and AN3PI have been overbought in last week’s rebound.
Forward Interest Indicators
Australian rates
Large swap-rates falls in line with global bond rates.
Swap rates:
- 10-year swap 4.34%
- 7-year swap 4.19%
- 5-year swap 4.11%
- 1-month BBSW 4.31%
