Daily Commentary BY THE CURVE TEAM –

Interest Rates On The Move

January 30th, 2018

The data and price action overnight provided a number of interesting talking points ahead of today’s key local data. The developments in the data threw up some questions marks over the sustainability of the current solid growth in the US and while most markets took a breather, one key market powered on.

The latest update on growth in the US showed how consumer spending continues to underpin the solid improvement in economy activity of late. There was one number however, that suggested the current improvement from the consumer may prove unsustainable if we fail to see wage growth pick up materially.

Like we have seen in Australia, the consumer has been running down their savings in order to offset the weakness in wage growth. In the US, the latest data showed that the savings rate as fallen to 2.4%, much lower that here in Australia. It is now at its lowest level since 2005.

There was some good news for the FOMC though. While the core PCE deflator only rose 0.2%, leaving the annual rate unchanged at 1.5%, on a three month annualised basis it is running at the FOMC’s 2% target.

Meanwhile, while most markets took a breather as the USD looked to base, the bond market remained on the move with yields breaking higher once again. The moves weren’t isolated to the US market, where the 10’s rose above 2.70%, the German 5 year rate was also on the move, rising above 0% for the first time since 2015.

Interestingly the Australian markets have remained a little more circumspect with our 10 year rate still lagging. This has seen the spread between Australian and US 10 year notes head back towards 0%.

Should we see the spread move in to negative territory for an extended period, it could place downward pressure on the AUD, something that would be welcomed by the RBA.

David Flanagan

Director - Interest Rate Markets