Daily Commentary BY THE CURVE TEAM –

Funding Pressures Build As Year End Approaches

22nd of June, 2018

The big news locally is the ongoing tightening of funding markets and spike in short term rates.

Meanwhile overnight the key updates in another quieter night are that the OPEC/Non-OPEC meeting looks like it will end up in a deal while the trade war instigated by the US shows no sign of dissipating. Positioning and arm wrestling ahead of the OPEC/Non-OPEC meeting continued overnight but its looking like a deal will be struck. After the Russians anchored discussion on an increase of 1.5m bpd and others wanted no increase, an agreement looks likely to be on 1m bpd. The key will be how much of that actually makes it on to the market as some members don’t currently have the capability to lift production.

Trade wars are set to continue according to comments from US Commerce Secretary Wilbur Ross. Overnight Ross was quoted as saying:

“What we have to do is create an environment where it’s more painful for these parties that have these huge trade barriers, both tariff and non-tariff, got to make it more painful for them to keep those barriers than to get rid of them”.

He then went on with specific focus on the the US administrations primary target, saying  “in the particular case of China, it’s compounded by their disrespect of intellectual property, the forced technology transfers, the cybersecurity breaches”.

As these offshore developments continue to evolve, the focus locally with the lack of data this week has been on growing funding pressures in Australian money markets.

For weeks now, short end interest rates have been trading at a significant premium to the cash rate. This short end pressure has intensified as the week has progressed with the quickly approaching financial year end adding to the pressures.

One thing that goes some way to explaining why have been experiencing growing short end funding pressures in Australia is the relationship between broad money and credit growth. The definition of Broad money according to the RBA’s website is:

“The widest definition of money published by the Reserve Bank of Australia (RBA). Broad money is defined as currency plus ADI deposits from the non-AFI private sector, plus other short-term liquid AFI liabilities held by the non-AFI private sector.”

What is important to know is that broad money growth has stalled the past six months while credit growth has continued largely unchanged. If the money in the system isn’t growing while credit is, the laws of supply and demand tell us that price has to rise. That is exactly what we are seeing.

Deposit rates that were already elevated have been rising further in recent days. The combination of an already tight market and year end funding pressure has resulted in a spike in demand for funding.

While this pressure may ease back somewhat after June 30, the relationship between broad money and credit growth suggest that underlying funding pressure and higher short end rates could be with us for some time.

David Flanagan

Director - Interest Rate Markets