Australian bonds snap decline following surprise fall in retail sales, RBA remains in focus

The Australian bonds snapped decline at the start of the week on Monday, following surprise tumble in the country’s retail sales during the month of December. Also, investors remain cautious ahead of the Reserve Bank of Australia’s (RBA) first monetary policy of 2017, scheduled to be held on February 7 for further direction in the debt market.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, plunged nearly 2-1/2 basis points to 2.78 percent, the yield on 15-year note also slumped 2-1/2 basis points to 3.24 percent and the yield on short-term 2-year fell 2 basis points to 1.83 percent by 04:10 GMT.

Retail sales for December were well below expectations, with the weakness concentrated in hardware and building sales and a decline in sales in NSW and Victoria.  Nominal retail sales fell by -0.1 percent m/m in December, from a downwardly revised 0.1 percent m/m in November, suggesting that the improvement evident through September and October failed to persist into the end of the year.

However, retail sales rose 3.0 percent y/y in December, compared with 3.2 percent y/y the previous month. Trend retail sales growth was steady at 0.3 percent m/m, but the trend y/y rate slipped to 3.2 percent. This helped offset further fall in bond yields.

Also, the central bank is likely to remain on hold at Tuesday’s meeting, keeping the interest rate at a historic low of 1.50 percent despite ongoing global uncertainties. According to the minutes from December’s policy meeting, board members expressed concern over the need to balance economic and financial risks, besides, maintaining stability, in an attempt to help push the ailing economy.

There is increasing note of evidence that Australia is at a positive transition point for nominal growth, inflation and wages. Also, the unemployment rate has remained unchanged for nine consecutive months (trend basis) and the improvement in Q4 full-time employment will alleviate RBA’s concern.

If downside tail risks continue to subside and broader momentum improves as expected, RBA's next policy move will be 25 basis points hike in the first-quarter of 2018.

Meawhile, the ASX 200 index traded 0.50 percent lower at 5,560.50 at 04:10GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bullish at 159.78 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex