Tim Hext: ‘Stagflation-lite’ is making the RBA’s job harder

What does today’s jump in monthly unemployment data mean for investors? Pendal’s head of government bond strategies TIM HEXT explains

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THE RESERVE BANK has a dual mandate: keep inflation under control and promote full employment.

Usually the two move in tandem. When more people have jobs, wages go up, and inflation tends to increase.

But right now we’re seeing inflation tick up, while employment is too weak to meet labour supply – which pushes unemployment higher.

It’s not a repeat of the stagflation we saw in 2022-23 – but it may unnerve some.

Today’s release of the September employment numbers show job growth (15,000 jobs) as expected.

But the unemployment rate picked up from 4.3% to 4.5% — a level not seen since November 2021.

This is on a seasonally adjusted basis. On a trend basis it remained at 4.3%. Participation picked up, causing supply of workers to outpace job creation.

Is it a trend?

Now, one month in a volatile series does not a trend make. And survey-based employment reporting is becoming more volatile.

Unfortunately for the RBA, the October report won’t arrive until after its next meeting on Melbourne Cup Day – a meeting that takes place the week after third-quarter CPI is released.

So the RBA will go into the meeting with unemployment 0.2% higher than its year-end forecast of 4.3% — and trimmed-mean (or underlying) inflation likely 0.2% higher than forecast at 2.8%.

We therefore have conflicting rules of thumb.

Generally an upwards unemployment revision of 0.2% would lead to cuts, while a 0.2% revision in inflation would leads to a hike (or at least no cut). 

Quite the dilemma!

Of course, we will wait and see what inflation brings.

Rate-cut expectations

In the meantime, markets are pricing a November cut at 70%, up from slightly under 50% pre data.

A cautious RBA might give it one more employment report and delay a cut till December.

However, December 9 is a bit late to impact the hoped-for pick-up in Christmas spending.

At Pendal we still hold the view the RBA would like to cut in November to give the consumer a boost.

Prior to today we thought a 0.8% or lower Q3 inflation number would be needed and 0.9% would be problematic. After today a 0.9% could even bring the RBA to the table.

Our forecast for Q3 trimmed-mean inflation remains at 0.8%, while a number of forecasters we respect are at 0.9%. So it’s unlikely markets can push the rate-cut odds much higher than 80% near term.

For longer-dated bonds there is more scope to rally back to the low end of recent ranges at 4%, but as always that will depend on global rates.

Into 2026 though we still expect the Australian economy to pick up as tax cuts, rate cuts and improving confidence in housing bring back the good old wealth effect.

Near term, given pricing, we have shifted long duration positions from the front end to the back end of the curve, though we will respect recent ranges. 

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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