Tim Hext: Is the next RBA move a cut?

Signs of a weakening Australian economy are giving markets growing confidence that the RBA’s next move may not be another hike. Pendal head of government bond strategies TIM HEXT explains

• Business conditions weak, capacity increasing
• Rate hike risks fade 
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WE HAVE talked numerous times about the richest source of timely information for the Australian economy – the NAB business survey.

It is the most forward-looking release in a sea of lagging indicators. 

In fact, we incorporate a number of signals into our macroeconomic quantitative signals on the Australian economy.

Business Conditions Weak – Capacity Increasing

While very weak confidence has been evident for some months now in both the NAB business survey and Westpac consumer confidence, the two more powerful forward indicators are business conditions – what businesses are facing – and capacity utilisation.

After all inflation is essentially a capacity versus demand problem.

Numbers released on Tuesday show +3 for confidence and capacity utilisation at 81.9.

These are not doomsday numbers but as the graph below shows over the last 10 years the current numbers are weak or at least weakening.

The +3 for conditions is a diffusion index. That is, the difference between optimistic and pessimistic firms. While still just positive, +6 is considered trend as businesses are generally optimistic.

The 81.9 for capacity utilisation is still just above trend of 81 but down from recent years.

The RBA would welcome this development, but anything below 80 would set off some warning signals, as seen from the chart above

Implications for rates

Now markets don’t focus nearly enough on the NAB business survey, remaining more obsessed with the volatile and short-term unreliable employment numbers.

However, they did not go unnoticed by NAB themselves who have removed rate hikes from their forecasts and now are calling for cuts in H1 2027. This is consistent with our view.

In the days since, despite volatile oil markets, the short end in Australia have caught a bid and at the time of writing three-year bonds are again pushing down towards the cash rates.

Peak cash is now less than one more hike and an August hike is down to only a one-third chance.

It may be too early to call for now, but comfort with Australian rates is improving despite expected hikes offshore. Australia for once has been ahead of, not behind, the global game.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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