Last week the Australian Bureau of Statistics released the figures for its latest labour force survey with a surprising jump of 71,000 jobs created in the last month. While there was some debate as to the accuracy of the figure, what it did show was that the Australian economy was perhaps in better shape than had been indicated in recent Reserve Bank (RBA) minutes.
Following the release of the ABS figures, markets moved to reflect a more optimistic outlook. The Australian dollar rose 0.5% against the greenback as FX markets viewed further interest rate cuts less likely as the probability or a rate cut next month dropped to 6% from 19% before the release.
So what does it actually look like when the probability of a rate cut decreases? Below I have graphed the 90-day forward rate swap curve. I chose this (90-day) as it is the most actively traded and the basis of most rate settings (the 90-day BBSW) for floating rate bonds. In the graph I show the swap curve the week before the announcement on the 6 March (the pale blue line) and the week after the announcement on the 20 March (the dark blue line).
90 Day Forward Swap Curve
[1]
What we see is the pale blue line dropping through to the September quarter of this year. The week before the ABS announcement the curve was showing a yields decreasing from 2.97% to 2.81% between the 6th of March and the September quarter, a drop of 0.16%. Whilst the dark blue line still shows yields decreasing over the period (or rate cutting bias), the drop post the announcement is only 0.06% (from 3.04% to 2.98%), ie. the chance of a rate cut has dropped.
What should you take away?
I have previously noted here that investors should be considering switching from fixed rate securities to floating rate securities because of the difference in spread on offer between the two security types being greater than the likely rate cuts. Last week’s news, and the movement in the rates curve has confirmed this as the right call.
While in the falling rate environment of the last year has made holding the security of a fixed return attractive proposition, investors need to consider what the forward curve is telling them and give up the added surety of the fixed return and look to ride the curve back up via securities linked to a floating rate.
And any readers of The Switzer Super Report with mortgages should race down to their bank today to take their last opportunity to lock in fixed rate loans – the rates on these will be adjusted up this week (with Westpac already moving).
A quick note on Cyprus
The big news globally over the last week has been the EU proposal to punish depositors as part of any Cyprus bailout. While this may have been brinkmanship to force Russia to come to the country’s aid (given a significant proportion of deposits in Cypriot banks are from Russian oligarchs) it none-the-less scared global markets; and no doubt depositors in other troubled jurisdictions like Portugal.
While the Cypriot parliament voted the proposal down, and Russia now appears to be stepping up, it has been interesting to note Russel Norman’s (co-leader of New Zealand’s Green Party) comments that New Zealand’s proposed Open Bank Resolution would have a similar effect in the case of a bank bailout. The resolution is supported by New Zealand’s Finance Minister and brings the Cyprus case a little closer to home. Given the protests in Cyprus over the weekend, the New Zealand government is probably rethinking the proposal today.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- James Dunn: Tapping into the jobs market [2]
- Ron Bewley: Is the local IT sector too small to matter? [3]
- Chad Padowitz: Fundies’ favourite – Wingate Asset Management on OXY [4]
- Andrew Bloore: Investment rules for your SMSF to live by [5]
- Paul Rickard: Question of the week – What is considered a long-term investment? [6]