Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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AUD: Retail sales miss questions RBA market pricing
Charu Chanana
Chief Investment Strategist
Key points:
- Australia’s April retail sales was a significant miss on expectations and show weakness on per-capita basis
- Market has brought rate cuts back on table after upside surprise in Q1 CPI last week, which may be questionable
- AUDUSD was rejected at 100DMA, AUDNZD attempting break above 1.10 despite a likely mispricing in RBA/RBNZ rate cut path
Australia’s retail sales for April missed expectations in a big way.
- Actual: -0.4% MoM, +0.8% YoY
- Consensus: +0.2% MoM
- Previous: +0.2% MoM (revised lower from 0.3%)
Numbers look especially weak when seen with a per-capita lens, given working age population growth of 2.9%. Per-capita retail sales are down 2% YoY. This signals that household budgets are getting squeezed amid high inflation and higher-for-longer interest rates.
Markets expect no rate cuts from RBA this year, and even a rate hike is back on the table after the upside surprise in CPI last week. This seems inappropriate given:
- The miss in April retail sales
- Australia’s inflation is trending lower overall and is below NZ?
- Property sector risks are rising amid high mortgage rates
This means dovish repricing risks remain. Also, with a likely peace deal between Israel and Hamas, markets may take off some of the risk premium built in commodities. Correction also seems to be looming in copper after the recent run higher, and Chinese PMIs today have failed to show significant traction. This is bearish for AUD in the near-term. However, other factors worth watching include:
- The Federal Budget announcement is due on May 14. If the extent of spending measures/income tax cuts that are targeted to relieve cost-of-living pressures is large, that can re-fuel inflation fears.
Still, markets have got a reminder that hawkish repricing may have gone too far, not just for RBA but also for the Fed as FOMC meeting comes next.
AUDUSD was rejected at 100DMA around 0.6585 yesterday, but a close below fibo retracement level at 0.6482 is needed to ensure that a downtrend is in place.
AUDNZD was rejected at 1.10. Q1 inflation for Australia was at 3.6% YoY, lower than NZ’s at 4.0% YoY and yet, market pricing is suggesting more than one rate cut from RBNZ this year while RBA is rather expected to stay unchanged or even go for a rate hike. That spells readjustment risks, and June 2023 high of 1.1056 should cap gains with a reversal below 1.0950 confirming downtrend.
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