Investing

A fresh look at what’s in store for 2019

  • 20.FEB.2019
  • Ian Martin,  XTB

Bond Bulls look to be in control

Significant developments in the market since mid-December warrant a review of my 2019 outlook.

Key highlights:

  • The US 10-year bond market is now at 2.65%, well away from the expected peak in rates of 3.75%
  • The expected rate hike in December occurred
  • Chairman Powell’s dovish commentary had the effect of calming risk markets while long term bond yields fell (prices rose).

 

It is possible there will be two more rate hikes. However, as I discussed in December, this is data dependent and timing is uncertain. This data dependency is likely to increase volatility in all markets. An increase in market volatility generally benefits bond markets, with investors switching out of higher risk assets into lower risk assets. This is also known as risk-off.

Therefore, with these factors and a more dovish central bank, our expectation of 10-year interest rates must be lowered to a peak of 3.00% to 3.25%.
We may be at the higher-end of the range than some forecasters.

 

RBA on Hold and Bond Bulls in control

The lower than expected GDP of 2.8% YOY has given Australia its own narrative, rather than simply following international markets. The RBA has lowered its own GDP forecasts. The Governor has stated that, subject to data, some of this pricing has already occurred.

Given the outlook, I would not expect 3-year government bonds to trade above 2% in 2019.

A simple guide to test this over time

Given the data dependency of the RBA, I’ve summarised their comments to allow readers to test the model throughout the year. The RBA commented that in light of recent data, the probabilities of a rate hike or rate cut have shifted to being more evenly balanced.

Rates down iconRates Lower

ISSUE / DATA COMMENT
Global economy. Downside risks have increased and diverging economy
China slowing momentum Targeted policy easing by Chinese authorities
Rest of Asia Trade tension. Domestic demand resilient and could benefit from manufacturing moving from China
Credit to smaller business becomes constrained
Australian dollar depreciated a little RBA seems comfortable with lower dollar
Consumption growth particularly weak Revised lower
Household income weaker Despite improving labour markets “outlook hinges on income picking up to offset falling house prices reigning in spending”
Housing: A significant area of uncertainty The level does not seem to concern them, with a 50% increase in the last 5 years. But it is how price falls affect spending decisions – the wealth effect
Euro growth moderating
Oil’s recent declines reducing headline inflation globally
Domestic money market conditions higher than a year ago Higher cost of money is doing the RBA’s job for them

Rates on hold or lower

ISSUE / DATA COMMENT
CPI lower than expected due to oil
Inflation low but above trough RBA expects 2.25% by end of 2020. Forecasts are revised slightly lower.

On Hold iconRates on hold

ISSUE / DATA COMMENT
GDP expected at 3% 2019 and 2.75% in 2020 RBA has been forced to lower previous forecasts
Credit to larger businesses becomes easier
Wage growth a little stronger
Business investment positive

Rates on hold or higher

ISSUE / DATA COMMENT
Japan expected to recover from Q4 natural disasters
Economy growing a little above trend RBA has been forced to lower previous forecasts

Rates higher

ISSUE / DATA COMMENT
Employment strengthening
USA remains strong Fiscal stimulus remains strong
Labour market continues to improve
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Events

  • 28Jun 2019

    YTMAST: AUSNET 5.75% 28 JUN 2022

    This is the coupon date

  • 15Jul 2019

    YTMTLS: TELSTRA 7.75% 15 JUL 2020

    This is the coupon date

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