Australian bonds slide despite fall in September retail sales; gains in Q3 PPI cushion further losses

Australian government bonds slid during Asian session Friday after investors have shrugged-off the lower-than-expected fall in retail sales for the month of September; however, gains in the country’s producer price index (PPI) for the third quarter of this year, helped cushion further losses in debt prices.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, remained tad higher at 2.657 percent, the yield on the long-term 30-year bond rose 1-1/2 basis points to 3.159 percent and the yield on short-term 2-year jumped nearly 2 basis points to 2.027 percent by 03:40GMT.

Australia’s retail sales rose 0.2 percent m/m in September, as we expected, but were weaker than market expectations. Retail volumes over the quarter were weaker than we and the market expected, up just 0.2 percent q/q, and well below the 1.0 percent rise in the June quarter. The June quarter result was revised down from a 1.2 percent increase.

In real terms, retail sales growth has been broadly steady over the last two years. Sales volumes were strongest for “other retailing”, which was up 2.2 percent q/q, and cafes, restaurants and takeaway food services, which were up 1.2 percent q/q. Perhaps reflecting the downturn in house prices, household goods retailing volumes were softer, down 0.7 percent q/q. Apparel retailing was 0.6 percent lower q/q.

Department store sales were 0.8 percent q/q down, continuing this sector’s shrinking part of the market. At 5.8 percent, the department store share is down from 8.1 percent ten years ago. In contrast, online retail turnover contributed 5.6 percent to total retail turnover from 4.4 percent a year ago.

However, the country’s Q3 PPI came in at 2.1 percent y/y, from 1.5 percent in the previous quarter and on a q/q basis, it came in at 0.8 percent, beating market expectations of 0.2 percent, from prior 0.3 percent.

Meanwhile, the S&P/ASX 200 index traded 0.29 percent lower at 5,795.5 by 03:50GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at 79.00 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex