AUS 10Y Yield Rises Toward Multi-Week Highs

Australia’s 10-year government bond yield rose around 5%, moving toward multi-week highs as renewed tensions in the Middle East revived inflation concerns. Oil prices climbed following reports of Iranian attacks in the Strait of Hormuz and a lack of clarity on an agreement to reopen the crucial waterway. Tehran is seeking to restrict US and Israeli vessels from using the waterway while demanding compensation from countries it considers hostile. Higher energy prices reignited inflation concerns and reinforced expectations that global interest rates could remain higher for longer. In Australia, after three rate hikes this year, markets are pricing in virtually no chance of a rate increase at the Reserve Bank's policy meeting next week following softer-than-expected second-quarter inflation data. Investors are also assigning little chance of a move in September, while pricing roughly a 60% probability of a rate hike in November if third-quarter inflation proves stronger than expected.

Australia’s 10-year government bond yield held its recent decline to around 4.9%, below a nine-week high reached on July 24, as investors continued to assess the policy outlook ahead of the Reserve Bank of Australia’s meeting next week. Latest data showed household spending rose 0.8% in June, well above forecasts of 0.2%, driven by another increase in discretionary spending, while annual growth accelerated to 6.0%, also exceeding expectations. The data supported the Reserve Bank’s view that consumer activity remains firm despite weak sentiment, although recent softer inflation and a cooling housing market have strengthened expectations that the central bank will leave its 4.35% cash rate unchanged next week. Markets are also pricing little chance of a rate hike in September, while assigning roughly a 50% probability of a move in November if third-quarter inflation proves stronger. Investors now await upcoming trade balance figures this week for further clues on the economy’s health.

Australia’s 10-year government bond yield fell to around 4.9%, easing from multi-week highs as softer inflation figures reduced expectations of further interest rate hikes. Headline inflation unexpectedly eased to a four-month low of 3.8% in June from both May's reading and forecasts of 4.0%, while monthly consumer prices unexpectedly fell 0.1% for a second straight month. Meanwhile, the closely watched trimmed mean inflation rate rose 3.6% annually, below expectations of 3.7%, while quarterly core inflation increased 0.8%, also undershooting forecasts. Although inflation remains above the RBA’s 2%–3% target range, markets sharply scaled back bets on another rate hike this year to around 50% from more than 90% before the release. The softer readings also reinforced the view that the central bank is unlikely to resume policy tightening at its August 11 meeting. Still, the RBA's governor recently warned that another rate hike may still be needed to bring inflation back to target.