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Pendal: Rate cuts still on track amid moderately higher unemployment
April 19, 2024
It will be a bumpy last mile for inflation, but volatility provides fertile ground for opportunistic trades, argues Pendal deputy portfolio manager, insurance and rates, ANNA HONG
- Jobs data indicates a continued bumpy last mile for inflation
- Volatility provides fertile ground for opportunistic trades
- Why bonds, why now? Find out more from Pendal’s income and fixed interest team
THE jobless rate rose only slightly from 3.7% to 3.8% for March – still well below the Reserve Bank’s expectation of 4.2% by June.
Taken in isolation, the number could suggest the economy has not slowed down significantly.
But that’s not the case. The Australian economy grew at a misery 0.2% in the fourth quarter of 2023.
Employment fell by 6,600.
That’s a small reversal to February’s employment gains, but it’s significant against a backdrop of 60,000 working-age adults joining the labour market every month. More on that below.
Reading the unemployment tea leaves
With three months to go, it is unlikely unemployment will reach the RBA’s 4.2% June forecast.
Will that worry the RBA, potentially delaying local rate cuts? Not necessarily.
Firstly, the RBA is not opposed to low unemployment. High unemployment is not a stated objective.
The Reserve Bank will only be troubled by low unemployment if it feeds through to inflation via strong household consumption.
Right now real household consumption is in negative territory and card-spending data shows little sign of a bounce.
Find out about
Pendal’s Income and Fixed Interest funds
It’s unlikely inflation will catch a second wind from the demand side.
The unemployment number does not need to reach 4.2% before the RBA achieves sufficient disinflation to cut rates.
Furthermore, the headline number does not tell the full story.
Net arrivals into Australia picked up pace again in 2024, adding more labour supply.
Some 60,000 working-age adults are joining the labour market every month and hiring intentions have reduced significantly.
The labour market is loosening and will continue to moderate from here.
What does this mean for investors?
It will be a bumpy last mile for inflation as notoriously laggy indicators like unemployment generate noise.
That volatility provides fertile ground for opportunistic trades, however.
At current valuations, we believe fixed-income investors should be positioning now for lower rates later this year.
About Anna Hong and Pendal’s Income and Fixed Interest team
Anna Hong is Deputy Portfolio Manager, Insurance and Rates, with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s fixed interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at April 19, 2024.
PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Funds and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Funds is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Funds.
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