Data released on Thursday by the Australian Bureau of Statistics reinforced the case after retail sales volumes fell 0.5 per cent in the quarter ending in June, the third quarter of consecutive declines.
“The probabilities are that they remain on hold for an extended period,” said Matt Wacher, chief investment officer at Morningstar for the Asia Pacific.
“The RBA has a very narrow path to avoid recession or at least a significant growth slowdown.”
Mr Wacher said stickiness in core inflation remained and consumers were also under pressure. “We have seen negative retail sales numbers for a while now and the trend is certainly down as savings are further eroded, and household budgets tighten.”
Commodities weigh
Bond traders imply a 50 per cent chance of an RBA rate increase, taking the peak rate to 4.35 per cent with November the most likely timing after the key inflation report. They expect the policy rate to stay high until mid-2024.
Weaker commodity prices and a stunted economic recovery in China from the pandemic have also weighed on the Australian dollar. The $A is often used as a bellwether for China because it is Australia’s biggest buyer of commodities.
Mr Hext said that a 5 per cent decline in the iron ore price since last week had added to this week’s weakness. That’s after iron ore futures hit a three-week low on Thursday amid concern about China’s property sector, which accounts for 40 per cent of the country’s steel demand.
The Aussie weakness comes as the US dollar topped a three-week high of 102.19 against a basket of major currencies amid signs China, the world’s second-largest economy, is slowing.
Meanwhile, US treasury yields rose to an eight-month peak overnight after investors sold bonds on the US government’s plan to boost its borrowing needs from September.
US 10-year Treasury yields rose as far as 4.13 per cent, a level last touched in November to steady at 4.1 per cent. That’s after the US Treasury Department said it would sell $US103 billion ($158 billion) of long-term debt next week which was up from its previous estimate and more than consensus.
Perhaps more concerning to investors was the government’s plan to increase its borrowing into 2024. Especially after Fitch Ratings cut the US sovereign’s rating to AA+ from triple AAA, citing an expected worsening fiscal outlook and a heavy debt burden.
“The [yield] move will test demand following the downgrade, which reflected rising deficits and government debt,” said Brian Martin, head of global economics at ANZ.
Elsewhere, the Bank of England holds its policy meeting on Thursday, and it will be a close call on whether the central bank lifts its benchmark rate by a quarter of a point or half of a point. Bond traders ascribe a 63 per cent chance of a standard quarter of a point to 5.25 per cent.