The Point

Pendal’s head of income reveals a high-conviction call and a non-consensus view for 2024

This week Pendal’s head of income strategies Amy Xie Patrick was asked in a Bloomberg webinar about her highest conviction call for 2024.

“While markets are pricing in a soft landing, I argued there would likely be a US recession in 2024,” says Amy.

“A lag in the impact of policy tightening has been evident in the slowdown of inflation and wages in recent months.

“This can be seen particularly in shifting trends in the labour market. The most obvious signal is a falling ‘quits rate’, signalling workers are becoming less confident about alternative job prospects.

“In my view, lagged effects will continue to appear in the data next year – and as we all know from history, recessions happen slowly, then suddenly.

“Likely in the second half of next year markets will realise disinflation is no longer immaculate – and is being caused by recessionary forces.”

Income and fixed interest wrap: latest outlook for inflation, rates and bonds

The Reserve Bank has revised its end-of-year inflation forecast to 4.5% – where it was in May. Are they right?

Pendal’s income and fixed interest team expects Q4 inflation between 0.7% and 0.8%, meaning the annual figure would be closer to 4.2%.

“If we’re right, then the November rate hike wasn’t needed,” says head of bond strategies Tim Hext.

“More importantly, this makes the chance of a February hike very low.

“Beyond February, inflation should remain sticky around 0.8% to 0.9% a quarter, meaning rate cuts are off the table for most of 2024.”

Pendal roughly agrees with the RBA’s expectation of a 3.6% number by mid-2024.

“By the middle of next year, US rate cuts may well be on the table, helping bonds find more support.”

In Australia, all eyes will be on Santa’s stocking to see the impact of the pre-Christmas hike.

Bond yields remain attractive on a medium-term basis, says Tim.

Moderating inflation is the trend of the year. Here’s what it means for investors 

Moderating inflation is now the trend of the year, says Anna Hong, an assistant PM with Pendal’s income and fixed interest team.

The US CPI increased 3.2% in the year to October – down from 3.7% annualised in September.

While Australia remains higher (we’re probably six months behind the US says Anna), we can see light at the end of the tunnel.

“Across the globe, economies have been seeing inflation come down as the resumption of supply chains eased price pressure on goods.

“This time around the inflation slowdown was much more broad-based, rather than just a goods-fuelled moderation.”

With moderating inflation as the trend of the year, investors can be more assured in their bond allocation, Anna argues.

“On balance, we believe Australian bonds should provide better risk-reward ahead.”

China’s economy is showing signs of recovery. Here’s how our fixed income team is responding

Recent data suggests China’s economic activity could be starting to stabilise.

Monthly industrial output sped up and retail sales grew faster than expected. Is this a turning point in the economic cycle?

That remains to be seen, cautions Pendal’s head of income strategies Amy Xie Patrick, who has taken a close look at the latest signals.

“It’s been only a few months since hopes for a re-opening led boom in economic activity were dashed,” says Amy.

“We think activity is now stabilising on a cyclical basis, and China’s economy can continue to gradually recover into the end of the year.

“But structural drags on the economy are heavy and deep-rooted.”

Amy has just published an article covering the strength of the recovery, structural issues and implications for global growth and investing.

Tim Hext: Australian business remains resilient as we enter spring

Business managers believe the economy remains on a decent footing and has even slightly picked up from July.

That’s the finding from NAB’s latest monthly business survey.

“The soft landing looks on track, at least for now,” says Pendal’s head of bond strategies, Tim Hext

“Businesses are not confident about the future, but still see conditions as favourable and even improving.”

But investors should separate the nominal economy from the real economy (adjusting for inflation), says Tim.

“Nominally, higher population growth has seen some expansion in the economy and increasing demand for goods and services.

“On the real side, inflation and higher rates has meant individuals are tightening their belts.

“Business knows this, and when the population growth falls back next year the nominal economy will also start feeling this.

“For now, though our models show rate hikes are still more likely than cuts, though the RBA looks happy to sit out the next few months.”

The good news? We’re avoiding recession. The bad news? Living standards are going backwards

This week the ABS released our latest national accounts – quarterly estimates of economic flows such as GDP, consumption, investment, income and saving – for the June quarter.

What did we learn?

“First, the good news,” says Pendal head of bond strategies Tim Hext. “We are avoiding a recession.

“GDP is 2.1% higher than a year ago, though slowing. It’s been 0.4% for two quarters now and will likely end the year near 1.2% – slightly higher than the RBA forecast of 0.9%.”

The bad news?

“We’re clearly in a per-capita recession,” says Tim. That means economic growth is not keeping pace with population growth.

Which means the average person is going backwards in their standard of living.

“Our population grew by 0.7% in Q2, the economy only 0.4%. GDP per capita is now 0.3% lower than a year ago and 0.6% lower than six months ago.”

Why is this happening and what’s next?