Recent junk bonds rally implied that the Fed's tightening pace might be under-estimated

Argentina’s default and geopolitical risks has pressed the yield curves to a more flattening state this year. However, we noticed there is a yield recovery of those high yield debts in the past few days after the big decline that had been going on since June, had reflected the improving economic condition and 2Q corporate earnings. If this phenomenon were to sustain any further, it will be implied that the current feed is running behind the yield curve. Markit CDX North American High yield Index also fell 17 basis points to 336.8 basis points overnight. iShare high yield Exchange Traded Fund (ETF) showed the sign of increasing inflow in recent days.

iShare high yield ETF

Once the market calms down on the Argentinean and other geopolitical risks, the flight destination could be aiming at those high yield assets again. The mask of Fed’s exceptional patience on its monetary policy could be removed as well, since we could not argue much on its latest economic releases such as 2Q growth, inflation and labour market report. Headline numbers of the Non-farm payrolls added up less than the previous one, but it still stood well above the 200k level. The U.S. added 209,000 jobs last month, following the 298,000 gain in June that was stronger than previously reported figures from the Labour Department. The jobless rate climbed to 6.2% from 6.1%, which however is not negative news, as more people have entered the labour force. Full time workers total rate accelerated while the part time workers declined with a higher participating rate, signalling that more people have joined the labour force.

Australia

RBA’s broad language on exchange rate and monetary-policy course remains unchanged. Exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving a balanced growth in the economy.

Monetary policy has appropriately configured to foster sustainable growth in demand and inflation outcomes which is consistent with the target. The most prudent course is likely to be a period of stability in interest rates.

Australia trade deficit had reduced due to lesser imports, but exported goods figure didn’t improve. However, Iron Ore and Coal exports slightly raised base on the improving Chinese demand that was spurred by the targeted stimulus.

All in all, RBA’s Official Cash Rate (OCR) shall be remained at 2.5% which is unchanged this year.