Australian bonds slump on better Chinese data, firm equities

The Australian bonds prices edged down, sending yields higher on Friday as investors cooled on safe-haven assets amid gains in riskier assets and firm Chinese economic data. The benchmark 10-year bonds yield, which is inversely proportional to bond price rose 1.50 pct to 2.578 pct and 3-year bonds yield climbed 1.27 pct to 1.994 pct by 0622 GMT.

China’s Q1 GDP rose to 6.7 pct y/y, was in the line of market expectation of 6.7 pct y/y, as compared to 6.8 pct in the previous quarter. Individually, growth in primary, secondary and tertiary sector slowed down to 2.9 pct y/y, 5.8 pct y/y and 7.6 pct y/y, from 3.9 pct y/y, 6.0 pct y/y and 8.3 pct y/y, respectively. Moreover, March Industrial production figures jumped to 6.8 pct y/y, higher than the market consensus of 5.9 pct y/y, as compared to 5.4 pct in the February. The March retail sales also climbed 10.5 pct y/y, higher than the market expectation of 10.4 pct y/y, from 10.2 pct in February.

“Bonds were lower despite slightly disappointing US inflation figures and comments by Federal Reserve official Dennis Lockhart that a June hike should remain an option” said ANZ in its report.

“Bonds moved lower in most major markets overnight, though they remain within the ranges seen in recent weeks and we would expect to see the Australian market move towards higher yields this morning”, ANZ added.

Also, the Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations. The Brent crude oil, a global benchmark, was lifted on hopes that key oil producers could agree on a production freeze this Sunday. The International Brent futures rose 0.16 pct at $ 43.92 and West Texas Intermediate (WTI) dipped 0.12 pct to $ 41.55.

Yesterday, the Australian March unemployment rate fell to 5.7 pct, lower than the market anticipation of 5.9 pct, as compared to 5.8 pct in February. Similarly, employment change rose to 26.1k (consensus was for 17k), prior -0.7k revised from +0.3k. Australia’s jobless rate unexpectedly fell to the lowest level in 2-1/2 years in March, reflecting a lift in business confidence and signalling the central bank is unlikely to ease policy in the near-term.

"The better than expected result removes a key support for our outlook for the RBA to deliver a rate cut in May. The upcoming 1Q16 CPI data (27April) and trends in the AUD could still tip the RBA into a May easing, but we think the balance of risks has now shifted to a later, August cut" said Macquarie Bank economist James McIntyre.

A further obstacle has been a bounce back in the Aussie, which gained more than 7 pct in March to be the best performer in a gathering of 10 major currencies this month. Meanwhile, RBA Governor Glenn Stevens also warned in his April statement that an appreciating AUD could entangle the adjustment under way in the economy.

Meanwhile, the S&P/ASX 200 index rose 0.47 pct or 24 points to 5,125.5 by 0622 GMT after reading better Chinese data.