Pimco Seeing Benign Inflation as Wages Freeze: Australia Credit

Aug 19, 2014 9:46 pm ET

Aug. 20 (Bloomberg) -- Pacific Investment Management Co. sees unemployment and record-low wage growth taming Australian inflation, supporting the best bond gains since 2011.

Yields show the outlook among traders for annual increases in the consumer price index fell to a 10-month low of 2.38 percent last week. That indicates inflation will slow from 3 percent in the second quarter, the upper limit of the Reserve Bank of Australia’s target of 2 to 3 percent. The nation’s debt returned 2.6 percent over the past three months versus 0.9 percent for U.S. securities, data compiled by Bloomberg show.

Pimco predicts CPI increases will stay within the RBA range because of deflationary pressures globally, driven by uneven economic growth in the U.S., the world’s biggest economy, and a slowdown in industrial production in China, Australia’s biggest export market. Qantas Airways Ltd. froze wages in February, government workers in Canberra are bracing for job cuts and dock workers at mining ports are striking for higher pay.

“We expect inflation to be pretty well behaved, back well within the RBA range, and a lot of that comes back to what we’re seeing globally,” Robert Mead, a Pimco money manager in Sydney told reporters in Sydney yesterday. “Unemployment going up, economy slowing, wage pressures minimal. We think inflation will start to reflect that.” Pimco, based in Newport Beach, California, manages the world’s biggest bond fund.

Bond Rally

Australian 10-year notes yielded 3.41 percent yesterday, dropping from 4.24 percent at the end of last year.

By calculating the difference between yields on 2022 bonds and same-maturity inflation-linked notes, investors get a gauge of trader expectations for consumer prices over the life of the debt. The 2.38-point figure compares with the average of 2.54 over the past two years.

Australia’s dollar traded at 93.32 U.S. cents yesterday as of 5 p.m. in Sydney. It’s up 4.7 percent this year, the most among 16 major currencies.

Two decades of uninterrupted economic growth have helped make Sydney the fifth-most-expensive city in the world, based on a ranking by Economist Intelligence Unit. Housing costs in the city set a record this month.

Now investment in the South Pacific nation’s mining industry is peaking and the economy is falling behind the Reserve Bank’s expectations.

Forecasts Cut

The RBA lowered its forecast for growth this year to 2.5 percent from 2.75 percent, in a monetary policy statement Aug. 8. The prediction for a measure of annual inflation excluding volatile items fell to 2.25 percent from 2.5 percent.

The jobless rate climbed to a 12-year high of 6.4 percent in July. Wage costs have risen at an annual pace of 2.6 percent pace for the past three quarters, the smallest gain in government data that started in 1998.

Qantas, Australia’s biggest airline, announced in February plans to cut 5,000 jobs and freeze pay until the company returns to profit. Prime Minister Tony Abbott’s coalition has pledged to eliminate 16,500 government jobs. Tugboat crews are threatening to disrupt shipments from the world’s biggest iron ore port as they negotiate for higher wages and improved conditions.

Weak Wages

Australia’s not alone. U.S. average hourly earnings have failed to recover from the recession that began in December 2007 and ended in June 2009. German labor costs rose at the slowest year-on-year pace in the first quarter since 2010.

In China, factory production rose 9 percent in July from a year earlier, versus 9.2 percent in June. The figure was as high as 15.1 percent as recently as 2011.

Chinese chief financial officers expected wages to increase 6 percent starting in the second quarter and covering the next 12 months, versus 8.8 percent in the year-before period, according to Duke University and CFO Magazine.

Bonds around the world are rallying, boosting the Bloomberg Global Developed Sovereign Bond Index 4.9 percent this year. It’s the biggest gain since 2011.

“Wage rates are at a low level in Australia and America and Europe and especially Japan,” said Hideaki Kuriki, a debt trader in Tokyo at Sumitomo Mitsui Trust Asset Management Co., which oversees the equivalent of $47.5 billion. “World inflation is falling.” Kuriki said he bought Australian 10-year bonds this month, in a telephone call Aug. 15.