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Australian bonds rally on RBA easing expectations
The Australian government bonds rallied on Monday as global government debt instrument gained 3.9 pct in 2016 amid deepening economic growth fears. Also, rising possibilities of further monetary easing from the Reserve Bank of Australia (RBA) due to lower inflation expectations drove investors towards safe-haven assets. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 3bps to 2.244 pct and the yield on the 2-year Treasury bond dipped 1bp to 1.586 pct by 0510 GMT.
Last week, the Melbourne Institute Survey of consumer inflationary expectations declined 0.4 pct to 3.2 pct in May. The survey is a representation of the consumer’s view of price stability over the next 12 month period. The sentiment displayed by the interviewed consumers mirrored recent data events we have seen from Australia. It was just over 2 weeks ago, that we saw a significant deviation on CPI, which came in 0.5 percentage points below expectations and 0.6 percentage points below its previous reading. Some economists have forecasted that continued pressure on inflation, and inflation related data, could see the RBA take further action.
The Australian bonds jumped majorly after the central bank slashed its inflation and GDP forecasts in its quarterly statement of monetary policy. The Reserve Bank of Australia concluded that the May policy easing was based on lower weak inflation outlook, supported by cooling housing sector. Said cuts in inflation and Gross Domestic Product (GDP) forecasts are mostly unchanged, year average for 2016 revised up 0.5 ppt. Said underlying inflation seen at 1-2 pct towards the end 2016, from previous forecast of 2-3 pct, 1.5-2.5 pct out to mid-2018, from previous 2-3 pct. They further added that GDP seen at 2.5-3.5 pct end 2016 out to end 2017, 3-4 pct to mid-2018 and Consumer Price Index (CPI) data showed broad-based weakness in domestic cost pressures, slow growth in labour costs, outlook for wage growth revised lower, to stay low for longer and then rise very gradually. RBA also cites that retail competition, softer inflation in rental & home building, falling fuel & utility costs and inflation expectations in Australia below average, but have not declined as much as elsewhere. Said outlook for domestic cost pressures, impact of AUD on inflation are key uncertainties and unemployment seen around current rate to mid-2017, before declining gradually. Furthermore, Q1 GDP growth seen around same moderate pace as previous quarter and household consumption to be a bit above average, net exports will continue to add to GDP and outlook assumes recent rises in bulk commodity prices are not sustained. Most of decline in mining investment to be over by end 2016, non-mining still subdued, they added.
The markets will now focus on the RBA May policy meeting minutes Tuesday (0130 GMT), April unemployment rate on Thursday (0130 GMT).The benchmark Australia's S&P/ASX 200 index was trading up 0.37 pct, or 21.5 points, at 5,343.5 by 0520 GMT.