Equity and credit markets remained strong last week with the latter being more balanced as issuers responded to buy-side demand. There was marginal change in the swap curves but the yield on 10-Year Government Bonds continues to retrace lower given slightly lower inflation expectations. The recent failure of Trumps healthcare plan has arguably increased the possibility of tax reform in the US and to some degree this should spur another reflationary event. In Australia, weather events related to cyclone Debbie are likely to have an inflationary and economic impact through various mediums. As an example in 2006, Cyclone Larry destroyed ~85% of the entire Australian banana crop. The knock on effect was a supply shortage and ~500% increase in prices. This in turn led to a ~23% quarterly increase in fruit and vegetable prices reported in the second quarter of 2006. Overall, we are confident that deflationary expectations are now a thing of the past and although there is excess capacity in the labour market, inflation should revert back to its long term average (~2 – 3%). In the listed market NAB Subordinated Notes II (ASX Code: NABPE) commenced trading (~$100.90), PERLS IX completed the offer ($1.64 billion) and started trading today (~$101.40) and Suncorp announced its book build margin at 4.10% with a minimum size of $300 million. The closing date for the Challenger Capital Notes 2 (ASX Code: CGFPB) offer is Thursday this week (6 April 2017). In the wholesale market, Centuria Capital Group (ASX Code: CNI) announced it will be issuing unlisted Secured Notes out of subsidiary Centuria Capital No. 2 Fund offering a fixed and floating rate tranche and raising a minimum of $50 million, with the ability to take oversubscriptions. In regulatory news the G-20 organisation issued a statement last week urging the Basel Committee to finalise the Basel III reforms, “without further significantly increasing overall capital requirements.” While this is not new, it does show there seems to be some disagreement of the way forward between Europe and the US in terms of regulation (i.e. capital requirements). It is our understanding that the Trump administration is yet to install new leaders of the four institutions representing the US on the Basel Committee and this may move the US away from BCBS directive. As a result of this disagreement, APRA may have to move on their own. Government agencies (APRA, ASIC) have been busy over the past few days implementing further oversight and prudential intervention into the overheated housing market housing market. Statistics from Corelogic released today suggest that the average home value in Australia’s eight state and territory capitals rose 12.9% in the past 12 months (fastest pace since May 2010).

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