Review of the markets for the week ending 23 October 2009
Australian interest rates rose for another week as the economy shows less and less resemblance to the US, UK and Europe. Equity markets around the world were volatile.
Economic data
The release of the October board minutes showed that the Reserve Bank’s rate hike earlier in the month had been the subject of extensive deliberation. While global economic prospects remain uncertain, the influence of “developments in Asia” ultimately tilted the argument in favour of a rate rise.
The Westpac Leading Index for August was up 1.1% for the month, bringing the annual growth rate to 1.7%, not too far below the long-term trend of 2.8%.
US housing starts were up 5% in September at 590,000, although this was slightly weaker than expected. Building permits also fell below forecasts, falling 1.2% to 573,000.
The US Fed Beige book noted “stabilisation or modest improvements” across the 12 Fed districts, but also pointed to weakness in the commercial real estate sector. The US leading indicators index was up 1% for September, narrowly beating expectations of 0.8%.
Following a meeting of European finance ministers, ECB President Jean-Claude Trichet warned of the dangers of exchange rate volatility, but said that he took seriously the US commitment to a strong dollar. Growth in the UK continues to look grim as GDP fell 0.4% for the September quarter, bringing the annual GDP change to -5.2%, well below forecasts for an annual fall of 4.6%.
Rates
The front end of the Australian curve rallied a little on a reduction in the estimated likelihood of a 50 basis point rate hike in November. Further out, the curve rates rose. Two-year government bond yields were up 0.11% and 10-year yields up 0.12%. The mid-part of the curve did not sell off as far, and the 3‑10 year futures curve steepened 5 basis points.
US long-end rates rose almost 0.1%, but the implied pricing of the Fed funds rate fell another 0.10%.
Credit
There was some weakness in credit markets over the week and the Australian iTraxx widened 3 basis points. AAA bonds were weaker, but BBB bonds managed to tighten around 9 basis points relative to Commonwealth government debt.
US and European credit indices had a quiet week.
The bond primary market saw the launch of a Downer EDI 4 year bond. Slated for $100 million, the BBB bond issue was then increased to $150 million and priced at 3.75% over swap.
Other markets
The momentum of the Australian dollar slowed a little, but it still managed a rise of 0.4% against the US dollar, finishing the week at US$0.925.
Oil prices rose again. The West Texas Intermediate (WTI) crude oil price finished the week over US$80, up 1.9%.
Share market performance continued to be a little rocky. The Australian S&P/ASX 200 was up 0.5% and the US S&P 500 was down 0.7%.
The week ahead
The Australian inflation figures released on Wednesday will be important for the Reserve Bank in determining monetary policy next month.
Further housing data is out in the US with the release of existing home sales figures and the S&P/Case Shiller house price index.
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