The Point

Income & Fixed Interest: Pendal’s quarterly insights on the themes driving Aussie markets

In their latest quarterly report, the team discusses some of the biggest trends affecting Australian fixed income investors right now – click through.

Tim Hext: Inflation is easing, but the RBA isn’t celebrating yet

The latest GDP data shows a weak Australian economy, but the numbers should pick up from here, says Pendal’s head of government bonds, Tim Hext. Here are five takeaways.

1. Government spending remains strong despite government investment tapering off. “This remains a central factor behind strong employment and inflation – and the animated debate between Treasurer Chalmers and RBA Governor Bullock,” says Tim.

2. Households are going backwards again. “Tax cuts and subsidies could bring the consumer back in Q3, but early data from July suggests it may be a slow burn.”

3. Households are barely saving anything. This likely indicates incomes not keeping up with prices rather than exuberant consumer spending, says Tim.

4. Australia’s commodity boom is waning (a negative for GDP) but remains historically strong

5. GDP should pick up from here. The RBA is forecasting 1.7% GDP this year and 2.6% in 2024-25. Since the first two quarters are up 0.4%, the RBA is expecting 0.6% to 0.7% quarterly rises over the next year.

“That may seem a bit optimistic, but the possibility of rate cuts and falling inflation could well see a decent rebound in the economy.”

Read Pendal’s latest fixed-income report

Tim Hext: What the US rate cut means for investors – and what’s next

Now that the US rate-cutting cycle has begun, the Federal Reserve has shifted its focus from inflation to employment, according to Tim Hext – Pendal’s head of government bond strategies.

The Fed’s 50 basis point cut, its first since 2020, brings rates down to 5%.

Instead of supporting markets, the cut pushed both bonds and equities in the opposite direction – with yields rising by about 5 basis points and equity markets falling around 0.5%.

This reaction, Tim explains, is more about market expectations versus the Fed’s own projections.

“The impact of hosing down expectations outweighed the larger actual cut,” he says.

The Fed’s rate projections show that the market is still ahead of the Fed, particularly in the near term.

With two meetings between now and the end of the year, Tim adds that employment data will be key to the Fed’s decision-making.

“The Fed is now more focused on employment than inflation, so payroll data will be front and centre,” he says.

He explains more in his latest article

Tim Hext: RBA minutes – inside a meeting of two-handed economists

Despite a narrative around re-emerging inflation, Australian investors are remarkably relaxed about the outlook for prices, observes Pendal’s head of government bond strategies, Tim Hext.

April’s inflation numbers – released yesterday – show a 3.6% increase in the annual Consumer Price Index. That’s slightly higher than March (3.5%) and more than the 3.4% markets were hoping for.

A rise in goods prices – mainly furniture, footwear and clothing – will not go unnoticed by the Reserve Bank and will require further investigation, says Tim.

But overall, the market is backing the RBA to do its job, he says. Implied 10-year inflation levels remain reasonably well anchored at 2.77%.

“Three-year yields in Australia moved back above 4 per cent after the data. We view this as a buying opportunity, since our medium-term view on inflation is positive.

“US inflation numbers come out on Friday and should show lower rental data feeding through to lower outcomes.

“Unless our concerns ramp up, we will be happy to be long duration into the winter months.”

Prevailing view or misconception? Pendal’s Amy Xie Patrick busts a few modern investing myths

The past few years have played havoc with conventional market assumptions.

Inverted yield curves don’t mean recessions are imminent. Expensive valuations can get more expensive. An aggressive hiking cycle need not bring about recession. Bonds don’t have to go up when equities go down.

These things can cause head-scratching among modern-day investors.

“But viewed through a longer-term lens – think multiple cycles and regimes – these events become clearer,” says Pendal’s head of income strategies Amy Xie Patrick.

In this article, Amy explains what’s really going on with these “broken relationships”.

For example, an inverted yield curve – when short-term interest rates are higher than long-term ones – is often viewed as a sign of a looming recession.

But history shows the lag between the curve inversion and recession is highly variable – three months to two years.

“It simply indicates the market expects interest rate cuts at some point down the line, and that current policy settings are restrictive and will be normalised – for whatever reason – in the future.”

Amy Xie Patrick: No more sugar hits for China