Since November 2016, the surge in inflation expectations has been the key driver of the rise in long-term nominal interest rates. These expectations consolidated in Q1-2017 as markets awaited new direction, which came last week in the form of the latest US jobs report. This report essentially gave the Federal Reserve the green light to raise US interest rates. Consequently, the US 10-Year treasury yield soared from ~2.30% to ~2.60% and now sits at its highest point since 2014. Unsurprisingly, the Australian 10-Year treasury yield followed suit and now sits just below 3.00% (levels not seen since November 2015). In corporate news, the Australian Competition and Consumer Commission (ACCC) released a Statement of Issues (SOI) regarding the proposed merger between Tabcorp Holdings (ASX: TAH) and Tatts Group (ASX: TTS). The most contentious issue outlined by the regulatory body was in relation to electronic gaming machine monitoring series and repair/maintenance services in Queensland which has forced Tabcorp to seek divestment of its Odyssey Gaming Services business. Other concerns were highlighted in the SOI and the overall anti-competitiveness of the transaction is still being analysed. With the final decision further delayed until the 4th of May 2017, Tabcorp has opted to bypass the ACCC by asking the Australian Competition Tribunal to make a ruling on the merger. Last week, credit rating agency Fitch revised its outlook from negative to stable for the major banks citing a conservative risk appetite and a strong regulatory system continue to underpin the banks’ financial strength. While Fitch expects capitalisation to strengthen further, it noted downside risks such as subdued wage inflation and rapid property price growth are still present. This is clearly at odds with Standard and Poors who has the banks on outlook negative.

Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – February

Interest Rates All eyes are fixed on the Federal Reserve, which is widely tipped to raise US interest rates for the third time since the Global Financial Crisis (GFC) when the FOMC meet later today. Last week we highlighted the US jobs report was the final hurdle required for a rate hike which beat expectations with 235,000 jobs added (versus forecast of 200,000). As a result, the US unemployment rate now sits at its lowest level since 2010 (4.7%) and with consumer and business expectations continuing to improve, markets are pricing in a 96% probability of the Fed raising US interest rates. Despite this, the RBA is largely expected to remain on hold throughout 2017 due to Australia’s high levels of household debt. On 3 March 2017, the ASX 30 Day Interbank Cash Rate Futures April 2017 contract was trading at 98.505 indicating a 2% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (unchanged on the week prior).