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Income and Fixed Interest
Tim Hext: Is March the month for hawkish hikes?
Our head of government bond strategies Tim Hext turned a few heads recently when he spoke of a “hawkish hike”.
Aren’t all hikes by definition hawkish, a few readers asked.
“They are,” says Tim. “But the accompanying statement is a chance to influence expectations of future hikes. This is especially so in countries where longer-term fixed rate home loans are predominant – no point hiking and seeing them go nowhere.
“We expect the US Fed to do this in their March hike, possibly pushing up the terminal level of rates as well. This will not be bond friendly.”
In Australia the RBA would be “extremely happy if by the end of 2022 inflation is at 3.25%, unemployment sub 4%, wages 3.5%, equities 10% lower, 10-year bonds 2.75% and cash rates 1%”, says Tim.
“It is not the RBA’s job to make sure superannuation balances have positive performance in any given year. Or to protect house prices. Given the massive rises in 2021 a negative year for assets is not a major setback. A year where labour outperforms capital is long overdue.
“Of course the Ukraine disaster will have an impact. But prospects of higher inflation will mean the Fed will need to get on with its hiking path, even if near-term risk markets are unsettled.”
Inflation: nowhere to run, nowhere to hide
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Inflation: nowhere to run, nowhere to hide
What impact will this week’s extremely strong inflation numbers have on next Tuesday’s RBA meeting?
New dwellings, food and fuel were the main drivers of the spike, but the real surprise came from a wider range of goods that normally see little if any inflation, says Pendal’s Tim Hext.
“Clothing, footwear, furnishings and a wide range of everyday items are going up by around 3% to 5% annually. Some of that is supply related and might come down if things normalise later in the year. But for now that is all speculation.
“The RBA once again has been railroaded on its forecasts and will need to address this number in next week’s meeting.”
Four rate hikes are priced for 2022 with the first in May. The RBA would have thought that too aggressive, but now may be forced to admit the market has been better at reading the economy, says Tim.
“Although the numbers support inflation concerns, we still don’t expect an unhinging of inflation from the medium-term 2% to 3% band.
“That’s still considered low — and business investment and the economy in general can easily handle that.”
Steve Campbell: Inflation concerns rising, rate hike on the table
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Steve Campbell: Inflation concerns rising, rate hike on the table
Steve Campbell: Material inflation miss brings future rate cuts into question
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Steve Campbell: Material inflation miss brings future rate cuts into question
Steve Campbell: The RBA kept rates on hold in September. Here’s what’s likely to happen next
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Steve Campbell: The RBA kept rates on hold in September. Here’s what’s likely to happen next
Steve Campbell: RBA rate cut likely in November
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Steve Campbell: RBA rate cut likely in November
Steve Campbell: RBA passes rate cut surprise
Steve Campbell: RBA ‘well-positioned’ to ease rates more aggressively
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Steve Campbell: RBA ‘well-positioned’ to ease rates more aggressively
Monetary policy settings remain restrictive in Australia even after two rates cuts this year, says Pendal’s head of cash strategies Steve Campbell.
Last week the Reserve Bank cut 25 basis points to 3.85%.
A pause in US tariffs and a plethora of other headlines saw the case for a larger cut diminished, says Steve.
“Domestically the RBA remains comfortable with the inflation outlook and where policy settings are at,” he says.
“There are signs that the rate cut earlier this year is helping households, though the majority of the cut is being saved – not spent.
“We maintain the view that two more cuts are forthcoming, likely around the quarterly cycle in August and November.”
Meanwhile bonds continue to offer good defensive value in this environment, Steve says.
“And uncertainty surrounding international events ensures plenty of opportunity for active managers.”
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Pendal profile: Meet our head of cash strategies Steve Campbell
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Pendal profile: Meet our head of cash strategies Steve Campbell
Steve Campbell: Labour data will determine timing of next RBA rate cut
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Steve Campbell: Labour data will determine timing of next RBA rate cut
A strong labour market and poor productivity meant the RBA’s rate-cut this week was not a laydown misere.
Was it a “one and done?”
“That’s highly unlikely,” says Pendal’s head of cash strategies, Steve Campbell. “So the focus will now move to when the next policy easing will occur.”
Before the next meeting in April (the first with newly separated monetary and governance boards), we will see updated wage price index data and two labour market reports.
If we don’t see a cut in April, further policy easing could still occur mid-year, Steve says.
The RBA remains “cautious and data dependent”, and didn’t give away much in its notes this week.
“Forecasting trimmed mean inflation at 2.7% until mid-2027 really means we don’t know how it will all unfold.”
Steve Campbell: Shouldn’t the RBA be following suit?
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Steve Campbell: Shouldn’t the RBA be following suit?
Steve Campbell: The RBA isn’t yet convinced inflation is a thing of the past. Here’s why
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Steve Campbell: The RBA isn’t yet convinced inflation is a thing of the past. Here’s why
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