Interest Rate Commentary

Non-farm payrolls (US employment data) for October was the primary data release last week which provided some mixed signals. The new data came in just under consensus at +161k (+173k expected) but upward revisions from prior months gave a very strong net increase. The issue was that gains were weak in the private sector with the government, education and health sectors representing ~45% of the growth. This had very little impact on the future market probability of a US rate increase in December but the noise surrounding the US election may be impacting this assessment.

From a domestic standpoint, the only thing of interest last week was the Statement of Monetary Policy (SoMP). Ultimately the RBA left its inflation and growth forecasts broadly unchanged. The RBA’s GDP growth forecasts are expected to be around 2.5 – 3.5% in the short term and inflation is to remain below target. Inflation remains the key and its arguable that the labour market is too weak to push wage inflation up which in turn impacts consumer inflation.

Yields across the curve remain low compared to long term averages. In November 2015, there was a progressive increase in the Australian 10-Year bond yield from ~2.60% to a high of 2.99%. But since then, the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently dropped to record lows (new low of 1.819% as at 2 August 2016). The 3-year bond has followed a similar pattern and broke out of its yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18%. It since collapsed to reach a low of 1.373% on the 2 August 2016. On the 4th of November 2016, the ASX 30 Day Interbank Cash Rate Futures November 2016 contract was trading at 98.515 indicating a 6% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (down from 16% last week).