The Bank of England and the European Central Bank left their interest rates unchanged last week, following the U.S. central bank’s decision to hold rates.

Chicago Fed President Austan Goolsbee said on Monday that he was confused by market reaction to Fed Chief’s remarks on possible rate cuts and the U.S. central bank is not precommiting to cutting rates soon and swiftly.

Cleveland Fed President Loretta Mester also said that financial markets had got “a little bit ahead” of the central bank with respect to rate cut expectations.

On the other hand, San Francisco Fed President Mary Daly said cuts to the U.S. central bank’s benchmark rate are likely to be appropriate next year because of an improvement in inflation.

CME Group’s FedWatch Tool is currently indicating a 67.5% chance the Fed lowers rates by a quarter point in March 2024.

The dollar index dropped to 102.07, losing nearly 0.5%.

Gold futures for February ended higher by $11.60 at $2,052.10 an ounce.

Silver futures for March ended up $0.214 at $24.321 an ounce, while Copper futures for March settled at $3.8980 per pound, gaining $0.0460.

In U.S. economic releases, a report from the Commerce Department said housing starts soared by 14.8% to an annual rate of 1.560 million in November after inching up by 0.2% to a downwardly revised rate of 1.359 million in October.

The surge surprised economists, who had expected housing starts to decrease by 0.9% to an annual rate of 1.360 million from the 1.372 million originally reported for the previous month.

Meanwhile, the Commerce Department said building permits slumped by 2.5% to an annual rate of 1.460 million in November after jumping by 1.8% to an upwardly revised rate of 1.498 million in October.

Building permits, an indicator of future housing demand, were expected to fall by 1.1% to an annual rate of 1.470 million from the 1.487 million originally reported for the previous month.

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Based on the promising Phase 2 data for both products, the company said it plans to accelerate the initiation of registration-enabling studies.

Looking ahead, TFF Pharma expects to present additional clinical data in the first quarter of 2024 to further support the advancement of TFF VORI and TFF TAC into registration-enabling studies.

The ongoing Phase 2 trial of TFF VORI is an open-label, randomized study evaluating treatment with TFF VORI versus oral voriconazole over a 13-week period in patients with invasive pulmonary aspergillosis or IPA.

According to the company, the treatment with TFF VORI resulted in positive treatment outcomes based on clinical, mycologic and radiologic responses while maintaining a favorable safety/tolerability profile, with no all-cause mortality, no IPA-related mortality, and no TFF VORI discontinuations due to an adverse event.

Further, the ongoing Phase 2 trial of TFF TAC is an open-label study in lung transplant patients who require reduced tacrolimus blood levels due to kidney toxicity. The trial’s Part A is a 12-week treatment period, and Part B is an optional safety extension period.

The company reported successful transition of all four patients from oral tacrolimus to TFF TAC, leading to significant lowering of tacrolimus blood levels with no clinical evidence of acute rejection. All patients who completed Part A of the trial chose to remain on TFF TAC and advance to Part B.

TFF Pharma said TFF TAC was well tolerated, with no mortality and no TFF TAC discontinuations due to an adverse event. Kidney function was maintained in all patients treated with TFF TAC.

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The attacks on Red Sea shipping by Houthi militants in Yemen have forced the suspension of some shipments through the Suez Canal, raising supply concerns.

According to reports, five of the world’s six largest shipping companies have announced they will not send ships through the Red Sea. British oil giant BP and Taiwan’s Evergreen became the latest to suspend transit.

However, oil gave up some gains later on amid uncertainty about the outlook for interest rates following hawkish comments from a couple of Fed officials.

New York Fed chief Williams said that a March cut seems ‘premature’, tempering market speculation about imminent rate cuts.

Also, Fed Bank of Chicago President Austan Goolsbee said on Sunday in an interview on CBS that it’s too early to declare victory over inflation fight, and interest-rate decisions would depend on incoming data.

West Texas Intermediate Crude oil futures for January ended higher by $1.04 at $72.47 a barrel.

Brent crude futures were up $1.53 or about 2% at $78.08 a barrel a little while ago.

“There’s still a lot of uncertainty and debate around the demand outlook for next year and it would appear the prospect of many rate cuts has boosted the odds of a softer landing which could support demand and may have done the same to the price in recent days,” says Craig Erlam, Senior Market Analyst at OANDA, UK & EMEA.

“Markets may have become overly optimistic about cuts next year. Then there’s also the risk that past cuts could have an even more dampening impact on the global economy or that OPEC+ compliance is as weak as the deal indicated it could be,” he adds.

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OPEC+ lifted its estimate f 2023 global economic growth based on its latest monthly report released earlier in the day. The cartel expects oil demand to grow by 2.2 million barrels per day next year.

OPEC blamed the latest crude price slide on “exaggerated concerns” about oil demand growth.

West Texas Intermediate Crude oil futures for January ended higher by $0.86 or about 1.3% at $69.47 a barrel.

Brent crude futures were up $1.08 or 1.47% at $74.32 a barrel a little while ago.

Data released by Energy Information Administration (EIA) showed crude oil inventories in the U.S. dropped by 4.3 million barrels last week, as against an expected declined of about 0.7 million barrels.

Gasoline inventories increased by 0.4 million barrels, while distillate fuel stockpiles increased by 1.5 million barrels.

The Federal Reserve announced its widely expected decision to leave rates unchanged for the third consecutive meeting.

The projections provided by the Fed along with its monetary policy announcement also suggest the central bank plans to begin cutting rates next year.

In support of its dual goals of maximum employment and inflation at the rate of 2% over the longer run, the Fed said it decided to maintain the target range for the federal funds rate at 5.25 to 5.5%.

The accompanying statement said the decision came as economic growth has slowed from its strong pace in the third quarter, while inflation has eased over the past year.

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The dream of debt-free homeownership at retirement is slipping away for more people despite increasing super balances, leaving older Australians increasingly exposed to interest rate changes.

Australians aged over 50 are expecting to retire with more debt than ever before, according to research to be released on Tuesday by AMP, with the Australian Bureau of Statistics showing a fourfold increase in household debt levels for those aged over 55 in the past 20 years.

Household debt levels have quadrupled over the past two decades for Australians aged 55 and older.Credit: Marija Ercegovac

An AMP survey of 1000 Australians aged 50 years and older indicated only one in seven people believed they would be mortgage-free when they retired, and one in nine expected to have more than $250,000 in unpaid debt.

AMP retirement director Ben Hillier warned that more retirees laden with debt will be exposed to interest rate fluctuations, and pose a challenge in financial planning for later years.

“For as long as we can remember, the Australian dream has been debt-free homeownership, which provides the financial foundation and security for a comfortable retirement,” he said.

“While home values and super balances are increasing, research shows that more and more Australians will be retiring with increasing levels of household debt.”

Data from the ABS shows average household debt ballooned from $62,000 in the 2003-04 financial years, to $242,000 in the 2021-22 financial years.

Greater debts mean Australians are making lifestyle sacrifices to help cope with the rising cost of living and pressure to pay off their mortgages, AMP said.

The findings come as an S&P Global Ratings report released on Sunday showed late payments across the prime residential mortgage backed securities (RMBS) sector remained low.

While interest rate rises have increased home loan repayments, and cost-of-living pressures have weighed on household balance sheets, the report said low unemployment and a rebound in property prices were tempering late payments and losses.

‘While home values and super balances are increasing, research shows that more and more Australians will be retiring with increasing levels of household debt.’

S&P Global primary credit analyst Erin Kitson warned that increasing global uncertainty and the lagging effects of monetary policy tightening would “tilt risks to the downside” over the coming year, but that RMBS performance would remain mostly stable if the labour market remained robust.

Kitson expects interest rates to be nearing their peak, but said persistent inflation could keep them higher for longer, and that while unemployment was historically low, the full impact of consecutive rate rises on the labour market was yet to be seen.

She said housing affordability pressures could delay homeownership for many millennials, and that this demographic of future borrowers was likely to be more highly leveraged given high property prices, especially in capital cities, adding to household debt.

While property prices have been supported by constrained housing supply, S&P’s report showed the ratings agency expects price growth to moderate to about 4 per cent as a slowdown in economic growth weighs on housing sentiment.

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Gold prices rallied to an all-time high of $2,151.20 earlier, buoyed by hopes the Federal Reserve will cut rates sooner than expected.

Fed Chair Jerome Powell’s remarks last week that inflation is moving in the right direction helped as well.

However, bullion subsequently retreated as the dollar gained in strength, with the U.S. dollar index rallying to 103.85, rising about 0.55% from the previous close.

Gold futures for February ended down $47.50 at $2,042.20 an ounce, falling nearly $100 from a record high recorded barely a few hours earlier.

Silver futures for March ended lower by $0.950 at $24.907 an ounce, while Copper futures for March settled at $3.8355 per pound, down $0.0960 from the previous close.

“Perhaps the combination of pending orders above the previous high and an illiquid moment in the markets contributed to the extremely volatile move, with the yellow metal now trading back around the previous record highs,” said Craig Ernam, Senior Market Analyst at OANDA, UK & EMEA.

Traders are now looking ahead to the release of the Labor Department’s closely watched monthly jobs report on Friday.

Economists currently expect employment to increase by 180,000 jobs in November after rising by 150,000 jobs in October, while the unemployment rate is expected to hold at 3.9%.

Reports on service sector activity, private sector jobs, weekly jobless claims and consumer sentiment may also attract attention in the coming days.

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Bond prices jumped early in the trading day and continued to advance as the session progressed. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 12.6 basis points to 4.352 percent.

The ten-year yield more than offset the 8.1 basis point jump seen on Thursday, falling to its lowest closing level in three months.

The early advance by treasuries came as a report from the Institute for Supply Management showed a continued contraction in U.S. manufacturing activity in the month of November, adding to optimism about the outlook for interest rates.

The ISM said its manufacturing PMI came in at 46.7 in November, unchanged from October, with a reading below 50 indicating a contraction. Economists had expected the index to inch up to 47.6.

“The weaker-than-expected ISM survey will reinforce financial markets‘ expectations that the Fed’s next move is a cut,” said Bill Adams, Chief Economist for Comerica Bank.

Treasuries saw further upside even after Federal Reserve Chair Jerome Powell’s comments calling speculation about interest rate cuts “premature” during remarks at Spelman College.

Powell acknowledged recent signs of slowing price growth but said the Fed is committed to keeping monetary policy restrictive until officials are confident inflation is on a path to 2 percent.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said.

Powell stressed the Fed is prepared to tighten policy further if it becomes appropriate, although most economists believe the central bank is done raising rates.

Jeffrey Roach, Chief Economist for LPL Financial, suggested traders viewed Powell’s comments as inching toward the dovish camp.

“A few weeks ago, Powell said policy is restrictive but today, he believes policy is ‘well into restrictive territory,'” Roach said. “I think it’s fair for markets to latch on to that subtlety.”

The Labor Department’s closely watched monthly jobs report is likely to move into the spotlight next week, while traders are also likely to keep an eye on reports on service sector activity, job openings and consumer sentiment.

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Bond prices moved higher in early trading and climbed more firmly into positive territory as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slid 8.3 basis points to 4.389 percent.

The ten-year yield more than offset the increase seen in the previous session, falling to its lowest closing level in over two months.

The rebound by treasuries came as traders continued to express optimism about the outlook for interest rates ahead of the release of some key economic data in the coming days.

The Commerce Department’s report on personal income and spending may be in the spotlight, as it includes readings on inflation said to be preferred by the Federal Reserve.

Economists currently expect the report to show the annual rate of consumer price growth slowed to 3.1 percent in October from 3.4 percent in September. Core price growth is expected to slow to 3.5 percent from 3.7 percent.

Traders are also likely to keep an eye on reports on consumer confidence, weekly jobless claims, pending home sales and manufacturing activity.

The Beige Book, a compilation of anecdotal evidence on economic conditions in each of the twelve Fed districts, may also attract attention along with remarks by Fed Chair Jerome Powell.

Treasuries saw further upside after the Treasury Department announced the results of this month’s auctions of $54 billion worth of two-year notes and $55 billion worth of five-year notes.

The two-year note auction drew a high yield of 4.887 percent and a bid-to-cover ratio of 2.54, while the five-year note auction drew a high yield of 4.420 percent and a bid-to-cover ratio of 2.46.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

On Tuesday, the Treasury is scheduled to announce the results of this month’s auction of $39 billion worth of seven-year notes.

Trading on Tuesday may also be impacted by reaction to reports on home prices and consumer confidence as well as remarks by several Fed officials.

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The corporate watchdog has put Australia’s $3.5 trillion superannuation industry on notice and flagged its intention to crack down on misconduct in the sector over coming months.

The Australian Securities and Investment Commission on Wednesday detailed its regulatory and enforcement work in the September quarter, and reinforced its pledge to hone in on the superannuation industry after finding that most super funds had largely ignored a new legal obligation to help customers prepare for retirement.

ASIC chair Joe Longo has put the superannuation sector on notice. Credit: Peter Rae

ASIC in September announced it was suing AustralianSuper over its failure to consolidate the accounts of more than 90,000 members.

The regulator has alleged the country’s biggest super fund for 10 years failed to put in place adequate policies and procedures to identify members who held multiple accounts.

“The July to September quarter saw ASIC achieve strong results in court and file significant matters that go toward our ongoing work to protect consumers,” ASIC chair Joe Longo said in a statement.

“Our focus on the best interests of members in the superannuation sector is part of our continuing work to make the financial system fair for all Australians.”

The Albanese government has also set its sights on the industry, warning big super to “urgently lift their game” as 3.6 million Australians prepare to retire over the next decade, meaning at least $750 billion currently invested in the accumulation phase of funds will shift to the retirement phase.

At the Australian Financial Review’s Super and Wealth Summit last month, Financial Services Minister Stephen Jones said the industry needed to improve its customer service.

“The sector must lift its game to help members achieve a dignified retirement,” Jones said. “They must be more responsive and more innovative because members have a right to expect the highest standards from their funds.”

ASIC, in its September quarter update, detailed the greenwashing cases it launched against Active Super and Vanguard Investments Australia; sued PayPal Australia for alleged unfair contract term with small business; and sued Westpac for failing to respond to hardship notices.

Association of Superannuation Funds of Australia interim chief executive Leeanne Turner said the sector was delivering for 17 million members.

“The industry has a strong commitment and focus on delivering the best possible member outcomes while meeting an extensive range of regulatory obligations and continues to engage constructively with regulators,” Turner said.

Market Forces superannuation funds campaigner Brett Morgan said it was great to see super funds put on notice for ineffective “active ownership” strategies that are failing to align with their own climate commitments.

“Between buying tens of millions of shares in Woodside and throwing its full support behind the company’s board, AustralianSuper has endorsed reckless oil and gas expansion plans which would lock in higher emissions for decades,” Morgan said.

“Any super fund with climate commitments that fails to demand an end to the fossil fuel expansion plans of companies like Woodside and Santos is greenwashing and undermining efforts to rein in harmful emissions.”

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Now that all the major banks have reported their 2023 profits, the conventional notion that Australia’s big four lenders act as a herd is being challenged.

Far from acting as an oligopoly, there is a clear gulf in strategy between the big four banks on how they handle an intensely competitive mortgage market.

The big split: Four banks, two agendas.Credit: Dominic Lorrimer

Commonwealth Bank and NAB are on one side, ANZ and Westpac on the other. Their behaviour is now so divergent that it’s difficult to tell which have gone rogue or which are being conservative.

While ANZ in particular has shown its willingness to weaponise discounted interest rates to hoover up customers, on the other end of the spectrum CBA is firmly unwilling to sacrifice its margins to build out its market share.

That said, there are a couple of common themes that the banks agree on. Most notably, their mortgage customers as a whole are coping well enough with the 13 interest rate rises they have endured over the past 18 months.

ANZ chief executive Shayne Elliott says homeowners are by and large rich. Credit: Pat Scala

The percentage of borrowers that have fallen behind on interest payments has barely moved since rates started their ascent last year, and the amount of money held in offset accounts has actually risen.

As ANZ’s chief executive Shayne Elliott describes it, the banking sector’s immunity from credit deterioration in mortgages stems in part from the make-up of these customers. Put simply, they are the rich.

“Homeowners skew to be more affluent in the first place, the 36 per cent of people with a home loan tend to be better off highly monthly income, more secure employment and their incomes are rising faster than the renter who is really in a tough spot – unfortunately (they are) younger.”

While other bank chief executives haven’t stated that fact quite so bluntly, they make similar observations.

The other clear theme from the results is that interest rate price competition has taken its toll on the profit margins of the banks.

After a strong first half when banks feasted on rising rates, the second half of fiscal 2023 has seen profits take an about-turn, as competition intensified. All four of the bank bosses have pointed out that competition for customers is now fiercer than ever before.

It is their response to the mortgage wars that has divided the banks – with the CBA and NAB showing their reluctance to sharpen their pencils on rate pricing to grow market share. Their reasoning is that indulging in a mortgage war involves writing barely profitable mortgages.

CBA has been prepared to cede market share, and even after that, its margins were still crunched in the quarter to September. The bank, which reported its quarterly numbers on Tuesday, noted its “disciplined approach to pricing which ensures shareholder returns remain above the cost of capital in a highly competitive market”.

While its mortgage market share grew by less than others, its share of business lending grew faster.

The divergent blueprints of the banks come with risks, and the recent profit announcements provided a platform for bank bosses to strongly prosecute their strategies. It’s been a slug fest of sorts, with the CEOs keen to explain why their approach works for their shareholders.

Elliott states his case forcefully: “In my view it comes down to what choices you have. Without naming names, some of those banks that have said they have stepped away from home loans have nowhere else to go.

“What are they going to do? … Now they are saying they are not going to grow at all. So they will be under pressure from shareholders (who will be) saying hang on a minute what’s this all about – you’re not growing your core business, so you had better take out a whole bunch of costs.

“So they will be under pressure, and they will work out one day that it’s better to be in than out,” he said.

CBA boss Matt Comyn, meanwhile, is happy to point out the damage heavy discounting can wreak on industry’s margins – in particular the way it’s squeezing the numbers of its competitors.

CBA chief executive Matt Comyn says the bank isn’t interested in chasing customers through discounts.Credit: Alex Ellinghausen

“Net interest margins of peers are under pressure [and] margins are a big factor weighing on investors’ minds … I think we have seen [sequential] margin deterioration in some of the peer results which would be the biggest negative margin erosion in [Australian] banking history.”

He says that as borrowers move from fixed interest to variable interest, the competition will remain elevated, “but the bigger factor [has been] some banks chasing volume and trying to win back volume or market share they have lost”.

It’s too early to tell which of the two strategies will win.

Elliott believes there is a structural ratcheting down in interest rates and therefore the market will remain competitive, so any banks staying out of the game do so at their own risk.

“There is always going to be competition, we are not going back to the old lazy days, there is always going to be someone out with sharp prices and a better offer.”

And in a last swipe at those unnamed banks sitting on the mortgage war sidelines, Elliott concludes: “It’s only banks that can sustain [discounting interest rates] because they are fundamentally better at what they will do, that will be able to stick it out.”

Meanwhile, Comyn concedes there is a structural element to lower rates but argues that there is also a strong cyclical element.

But one thing is for sure – not since NAB’s famous “break up” campaign in 2011 have we seen such a gulf in strategy open up between our big four banks.

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The Treasury said it plans to auction $112 billion worth of long-term securities next week, including $48 billion worth of three-year notes, $40 billion worth of ten-year notes and $24 billion worth of thirty-year bonds.

Last month, the Treasury sold $46 billion worth of three-year notes, $35 billion worth of ten-year notes and $20 billion worth of thirty-year bonds.

While the ten-year note auction attracted modestly above average demand, the thirty-year bond auction attracted average demand and the three-year note auction attracted below average demand.

The results of this month’s three-year note auction will be announced next Tuesday, the results of this month’s ten-year note auction will be announced next Wednesday and the results of this month’s thirty-year bond auction will be announced next Thursday.

The Treasury also said it intends to continue gradually increasing coupon auction sizes in the upcoming November 2023 to January 2024 quarter.

“As these changes will make substantial progress towards aligning auction sizes with projected borrowing needs, Treasury anticipates that one additional quarter of increases to coupon auction sizes will likely be needed beyond the increases announced today,” the Treasury said.

The Treasury plans to increase the auction sizes of two-year and five-year notes by $3 billion per month, three-year notes by $2 billion per month, and seven-year notes by $1 billion per month.

As a result, the auction sizes of two-year, three-year, five-year and seven-year notes will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of January 2024.

The Treasury also said it plans to increase both the new issue and the reopening auction size of the ten-year note by $2 billion and the thirty-year bond by $1 billion. The Treasury plans to maintain the 20-year bond new issue and reopening auction size.

In a letter, Treasury officials said the recent increase in treasury yields is “partially a response to stronger-than-expected activity and labor market data.”

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Bank of Queensland boss Patrick Allaway has blamed the economic cycle, margin pressures across the industry and the bank’s higher cost of funding for its weaker results as its shares dropped to a 15-month low.

In an announcement to the ASX on Wednesday, BOQ reported an eight per cent drop in cash earnings to $450 million for the 2022 financial year and a final fully franked dividend of 21 cents a share.

Chief executive Patrick Allaway recognises the difficulty the bank has faced.Credit: Dan Peled

Allaway said the bank’s results reflected some of its failings but also the market cycle, industry margin headwinds from inflation, heightened competition across lending and deposits and investment in the bank’s risk capability, customer experience and digital transformation.

“We recognise that this has been a difficult year for our shareholders and take accountability for the operational risk failings that led to the two court-enforceable undertakings,” he said. “There have also been lower margins across industry as the economy goes into a more difficult period, which was exacerbated for BOQ because our cost of funding is higher as a smaller bank.”

Shares in the BOQ slipped 6.2 per cent to $5.42 a share in afternoon trading and were 20 per cent lower over the year.

However, Allaway said the bank was improving its return on equity, following its transformation plan, delivering on budget and improving customer experience. “When the cycle turns in the next 12 months, we’re well positioned for growth,” he said.

BOQ’s net interest margin – what it charges for loans compared with funding costs – dropped two basis points over the year to 1.69 per cent, driven by competition for lending and higher funding costs across the industry.

‘There may be a rate decrease towards the end of next year, but it will be a more difficult period for consumers in 2024.’

Allaway said margin pressure was an “industry phenomenon” as banks competed to meet repayments on the Reserve Bank’s term funding facility lending, the bulk of which is set to be repaid in the next six months, pushing up the cost of funding. On the asset side, he said the mortgage market remained under pressure throughout the year, with management deciding to moderate growth where economic return could not be achieved, but that it would probably turn around soon.

“It’s hard to forecast the mortgage market, but I can’t see the current cycle continuing in the medium term,” he said.

However, Citi analyst Brendan Sproules said the market was currently expecting mortgage pricing to deteriorate.

While the bank’s total income grew five per cent over the year, it was partly offset by an eight per cent increase in expenses and a return to a “more normalised level” of loan impairment expense.

“We have seen a small increase in arrears in our mortgage book from the lagged impact of 12 consecutive interest rate rises and the cost of living,” Allaway said. “But the book is well secured, we’re not alarmed by those increases, and we don’t anticipate material losses.”

While BOQ grew its retail deposits by $3.1 billion, Allaway warned that interest rates would probably stay higher for longer.

“Inflation has been quite stubborn, and we may need at least one more rate increase in the near term,” he said. “There may be a rate decrease towards the end of next year, but it will be a more difficult period for consumers in 2024.”

Sproules said BOQ’s results came in below consensus expectations, especially in terms of its revenue and net interest margin.

“The second half of 2023 represented a difficult half, with underlying earnings declining by 20 per cent,” he said. “The 2023 financial year net interest margin was two to three basis points below expectations.”

However, Sproules said the bank’s outlook commentary suggested earnings had not yet troughed.

“BOQ is flagging slower credit growth as they manage margin over volume, but it comes after a half where neither have been accomplished,” he said. “It was a very weak result, with the likelihood of further negative revisions to the 2024 financial year consensus expectations.”

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