Review of the markets for the week ending 30 October 2009
This week Inflation figures confirmed the case for an Australian rate rise. Meanwhile, both credit and equity markets were weak around the globe.
Economic data
Australian headline inflation for the September quarter came in very close to forecasts at 1%. Falling transportation and financial services prices in prior quarters mean that the headline inflation rate year on year is now down to 1.3%, but the Reserve Bank’s preferred measure, the trimmed mean, is still up at 3.2%, outside the bank’s 2-3% inflation target.
The US S&P/Case-Shiller house price index rose 1.2% in August, bringing the 12 month price change to -11.3%. While this was a little better than the market expected, September new home sales were released later in the week and, at 402,000, were almost 10% lower than forecasts.
Perhaps the biggest surprise of the week was US GDP which grew 3.5% in the September quarter, better than the expected 3.2% growth. The optimism this generated was dented on Friday by the 0.5% fall in consumer spending in September.
Rates
Interest rates at the very short end of the curve were up, pricing in upcoming cash rate hikes, but beyond six months, the market is becoming less bearish about the extent of future rate rises. The market-implied cash rate 12 months out closed 0.23% lower than it was a week ago.
Two-year government bonds rallied 0.23% and 10‑years rallied 0.16%, steepening the 3‑10 futures curve 11 basis points.
It was a volatile week for US rates and Treasury yields finished the week 0.11% lower.
Credit
As credit markets took their cue from weak equity markets, spreads widened. The CDX investment grade index was 9 basis points wider and high yield 63 basis points, while the euro investment iTraxx was 5 basis points wider. The Australian iTraxx index was unchanged on the week, but is likely to catch up with some widening following offshore weakness on Friday after the Australian close.
There was no new bond issuance in the domestic market.
Other markets
The US dollar staged something of a recovery, gaining 1.9% against the euro. The Australian dollar finished the week at US$0.915, a fall of 1.1%.
Oil prices showed some weakness mid-week, but finished almost unchanged. The WTI crude oil price fell back just below US$80 per barrel. The price of gold was down 1.4% to US$1,045/oz and the broad CRB index was stable.
Equity markets were down and the Australian market fared worse than most. The S&P/ASX 200 slipped 4.3%, while the S&P 500 fell 4%. The Nikkei 225 was down 2.4% and the UK’s FTSE 100 fell 3.8%.
The week ahead
As is traditional, the Reserve Bank has its November meeting on Melbourne Cup Day this Tuesday. Consensus is still for a 0.25% rate rise, although some view 0.50% as a possibility. The next day retail sales and building approvals figures are out.
The Fed also has a rate decision this week, but unlike in Australia, no-one expects to see a change in US rates.
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