The Point

Amy Xie Patrick: There’s more to life than Term Deposits

THE RESERVE BANK held the Overnight Cash Rate steady at 4.35% on May 7 for the fourth consecutive meeting.

At first look, this makes 12-month term deposits seem attractive.

The 2022 “everything sell-off” still haunts many investors, while the allure of higher interest rates and certainty of returns is hard to turn down.

At the margin, however, investors we speak to are starting to wonder whether there is more to life than term deposits — even in a higher interest rate environment.

Our answer? Yes!

Tim Hext: Looking beyond the noise at this year’s Budget

Despite a half-hearted post-Budget “higher-spending, higher-inflation” narrative, bond yields were “sharply unchanged, to quote the cliché”, says Pendal’s head of government bonds, Tim Hext.

“I think the RBA will see the Budget for what it is: a mixed bag of measures that will leave them hopeful of further inflation relief, but wary of whether the 2-3% target band can be achieved and sustained.”

Some Budget hawks are calling for higher rates to combat inflation they expect from new spending measures and future deficits based on conservative commodity price forecasts, Tim says.

“My view is we are sufficiently past the pandemic that supply chains can handle a modest rise in consumer spending without stoking inflation.”

A number of direct Budget measures – especially the $300 electricity subsidies – should help the CPI, Tim says.

Federal treasury is forecasting inflation of 2.75% for 2024-25, while Tim expects the RBA to revise its forecast down from 3.2% to around 3%.

In a short analysis piece, Tim goes into more detail and covers the impact on bond issuance.

Tim Hext: What we learned from the latest GDP data

The December-quarter GDP numbers stopped just short of the “no-growth” scenario we were slowly sliding towards last year at 0.2%.

What were the takeaways for markets?

“First of all, rate hikes have worked,” says Pendal’s head of bonds Tim Hext.

“While the fixed-rate cliff has been more of a speed bump, the RBA will be pleased that higher rates are reducing demand.

“Lower immigration in the year ahead will also help. The supply side of the economy has largely normalised.

“This will give the RBA further comfort that the path back below 3% inflation is achievable.

“This opens the door to rate cuts later in the year. We think three cuts – September, November and December.

“By then the US Fed should be well into rate cuts. Inflation – while sticky around 3 per cent – would be considered under control.

“GDP would be allowed to push back up towards 2% or above without threatening the inflation outlook.

“This would be a good outcome for all and meet the objectives of the RBA.”

Amy Xie Patrick: Outlook from the bond enthusiast

What are the main factors impacting income strategies right now?

Pendal’s head of income strategies Amy Xie Patrick has just published a deep dive on how her view has evolved in recent months.

Among Amy’s main observations:

• Consumer resilience has been surprising and may be explained by a rise in real incomes as inflation cools
• This limits the ability of bonds to keep rallying since central banks may be fearful of reigniting a new wave of inflation
• As markets entertain the idea of “no landing”, there could be heightened market volatility and bouts of “everything sell-offs”
• If growth remains resilient these bouts should be short-lived and present opportunities for active portfolios.
• A hard landing isn’t off the table, but it’s too soon to position for it just yet