Australian Markets Weekly: 18 July 2016

Last week’s local data provided further indication that the recovery in the non-mining sectors has continued through the June quarter.

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The last bond bear has left the building

  • It’s a relatively quiet week data-wise, locally and offshore. Tomorrow’s RBA Minutes from this month’s Board meeting will be under focus for any clues on RBA policy leanings. Offshore data and events generally less market significant this week.
  • Last week’s Australian economic reports continue to indicate further growth in the non-mining economy in the June quarter. Markets are looking ahead to next Wednesday’s Q2 CPI ahead of the August RBA Board meeting on Tuesday 2 August – NAB will publish its preview in the next 24 hours but another ultra-low core CPI is unlikely, while the headline rate will be boosted by oil prices and regular seasonal developments
  • Australia’s 10 year government bond yields have been falling for 34 years and a few weeks ago reached an all-time low below 2%.
  • Inside, we discuss the factors that have contributed to the decline in yields and conclude that while bond yields are likely to remain very low relative to recent decades’ history they are likely to be somewhat higher than current yields in the years ahead.
  • Contributing factors are: 1) global bond yields can only go so negative which means there is a limit to the rally in global yields; 2) the bond market’s pricing for Australia’s annual inflation rate to average 1.6% over the next decade looks too low; and 3) the ongoing pick-up in private sector credit growth implies borrowers think current interest rates are low.

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