Weekly Highlights

In a continuation of performance from the previous week the major banks led domestic equity markets higher (up 76 points or 1.49% on the week) while Australian Government Bonds were weaker. The long end of the bond curve (5+ years) widened by ~0.15% which is reasonably significant in the context of the low interest rate environment as this equates to nearly $1.50 in capital on a 10-Year Bond.   In New Zealand, the RBNZ surprised the market by cutting their cash rate from 2.50% to 2.25%. It remains to be seen whether the New Zealand banks will pass on this rate cut to borrowers in full or take the opportunity to rebuild their net interest margins by passing only part of the cut. If the RBA  eventually reduces our cash rate below 2.0% we expect that only a portion of this will  similarly be passed on to borrowers.   Housing loan data released last week showed a 1.6% decrease in investor loans in January (14.8% lower than January 2015). Both the number and value of loans to owner occupiers also fell during January (3.9% and 4.3% respectively) but this was higher than a year ago (up 7.3% and 16% respectively). This demonstrates how the housing market is rebalancing from investors to owner occupiers. The data also showed an emerging demographaphy change where baby boomers are downsizing to release capital by selling expensive houses to buy cheaper townhouses or apartments in the same suburb. It is this trade that well may be supporting house prices as the moment as the ‘Asian bid’ has been waning a little as Chinese capital controls start to take effect.   In more domestic news our Senior Banks Analyst continues to watch the performance of the listed bank hybrid market since PERLS VIII was announced. Whilst the rally in securities with an expected call date of less than a year has stalled a little, investors have continued to buy securities between two and three years. Longer dated hybrids continue to underperform the broader market, such that the hybrid credit curve continues to steepen. For more information click here.   Click below for Interactive Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2014/15 (Monthly)   Interest Rates With the RBA’s recent decision to keep the cash rate on hold at 2.00%, interest rate futures are now suggesting that governor Glenn Stevens will remain conservative on policy for the final six months of his tenure. Although current inflation is accommodative for future cuts, the cash rate has been stable since last May and there appears to be reluctance to lower it further.   It will be interesting to see if Australian policy makersare influenced by the stronger currency and actions by their counterparts in Europe and New Zealand (which dropped official rates last week).   This week employment data for February will be released. Unemployment increased back to 6% in January (decline of 7,500 jobs) after a record quarterly jobs gain to end 2015. The market is currently expecting an increase of 13,500 jobs and the unemployment rate to remain stable. This should give us greater insight into future RBA policy decisions for this year and there could be a significant shift in expectations accordingly over the coming week.   In February 2015, the 10-year bond yield hit an all-time low of 2.27% before lifting to highs near 3.15% on 11 June 2015. In early November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. Since mid-December the flight to quality has meant the 10-year yield has given back the changes in Q4 2015 and on 1 March 2016 hit a 6 month low of 2.35%. However, in the past week we have seen a sharp bounce back up to 2.65%. The 3-year bond has followed a similar pattern and broke out of its recent yield range (1.90 – 2.1%) in November/December 2015 reaching a high of 2.18% on 7 December 2015. It retraced back to a short term low of 1.70% but then jumped back up to 2.03% in the past week. On 14 March 2016, the ASX 30 Day Interbank Cash Rate Futures April 2016 contract was trading at 98.020 indicating a 10% expectation of an interest rate decrease to 1.75% at the next RBA Board meeting (up from 3% previous week).   Bank News There was a flurry of bank news last week. We summarise the key points below:   NAB contacted mortgage brokers about a “new pricing structure” which is effectively an out of cycle increase in the mortgage rate. This new pricing will be based upon whether loans are to an owner-occupier or to an investor as well as looking at the structure of the loan ( i.e.  interest only loan or principal and interest). In part this is a continuation of the theme we have witnessed over the past six months as the banks continue to respond to regulatory pressures to hold more capital against their loan books as well as passing on the higher funding costs demanded by bond and hybrid investors. To date customers, employees and shareholders have  borne the majority of this increase in cost. Non-bank issuers such as Firstmac have also tightened their lending standards where a loan to value ratio of more than 80% must be principal and interest.   CBA’s CommInsure business came under fire last week being accused of systemically rejecting legitimate life claims from terminally ill policy holders. The ANZ & NAB have gone on record that they are currently reviewing their practices as part of normal business procedures. These businesses form part of the wealth business units and give another reason for the banks to eventually exit this space due to increasing capital and compliance costs. The NAB followed the ANZ in announcing the move to refocus their private bank on banking and move the wealth advice service into the JBWere business.   The regulators continue to pursue the ANZ over the bank bill swap rate rigging case and are now analysing the telephone and email records of the other three major banks as well.   In other news Macquarie Bank will also have restrictions placed upon its banking license after ASIC said it broke rules on withdrawals from client trust accounts. This action by ASIC is more damaging than mere fines and the four major banks should take note of this as similar action could be taken against them if found guilty of offenses.