The Point

Tim Hext: What to pay attention to in the RBA’s latest monetary policy statement

When the RBA releases its quarterly monetary policy statement, our head of bond strategies Tim Hext first reads through the forecasts and then goes to the boxes.

“Box A” and “Box B” are typically special interest topics, offering an insight into what our central bankers are discussing and investigating internally.

Box B in the latest statement covers insights from the RBA’s business liaison program, including recent chats with 230 Australian businesses and organisations.

“Box B reveals a growing view that businesses are seeing an easing in demand and costs, consistent with an increasingly neutral RBA,” says Tim.

It also shows businesses expect an easing of wage rises in the year ahead – even though the Wage Price Index isn’t forecast to peak until the end of the year.

“This shows the RBA will likely stare down commentators who talk about higher wages meaning further rate hikes,” argues Tim.

Amy Xie Patrick: The market’s getting excited about China again, but it may be premature

THE latest message from China’s top decision-making body caused a stir this week when investors noted softer language on property.

For the first time since 2016, President Xi Jinping’s signature slogan that “houses are for living, not for speculation” was missing from a note that followed a Politburo meeting.

That got the market excited about the potential for a meaningful China stimulus push via the property sector.

But the market is getting ahead of itself, says Pendal’s head of income strategies Amy Xi Patrick.

“The line has likely been dropped because it’s simply no longer needed. Buyers are no longer speculating. They are actively selling in an attempt to exit the property game altogether.”

Amy believes there is no silver bullet for the Chinese economy.

The case for bonds as rate hikes push Australia towards recession

Recession talk increased in Australia this week after the RBA’s decision to lift rates for the 12th time in just over a year.

Pendal’s Anna Hong agrees the chance of a recession in Australia is increasing with rate hikes.

That bolsters the case for Australian government bonds, cash and high-grade investment credit, argues Anna, an assistant portfolio manager in Pendal’s Income and Fixed Income team.

Australia is one of only a handful of countries to record a budget surplus this financial year and – not withstanding the threat of recession – remains in good economic shape, she says.

“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.

“Australian banks are world-leading in capital strength. As a result, assets within Australian shores are safer than almost any other part of the world.”

Budget 2023: Stage 3 tax cuts remain centre stage

The federal budget didn’t contain much to move markets, but investors will be more interested in the impact of next year’s Stage 3 tax cuts, says Pendal’s Tim Hext.

The cuts will cost the government some $243 billion in lost revenue over the next decade, says Tim.

“Though I am less concerned about their affordability – after all, the government via the RBA owns the printing press – than the economic impact,” says Tim.

“The economic backdrop against which they will take place is important. We expect inflation to be nearer 3% and GDP nearer 1% by mid next year.

“This will make the tax cuts economically affordable, since their boost to inflation and activity will be manageable.

“But it means the RBA may be more reluctant and slower to cut rates.”

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

Fixed Interest wrap: Our views on latest inflation data, the RBA review and YFYS reforms

Yesterday’s March-quarter ABS data showed goods inflation almost flat-lining as supply chains return to normal, while services inflation jumped to 6.1%.

Given it’s a one-third / two-thirds split between goods and services, this leaves the medium-term annual inflation pulse near 4%, says our head of bond strategies, Tim Hext.

“The RBA will be encouraged that inflation is falling,” says Tim. “Their 4.75% forecast for 2023 now looks high and will likely be revised down in May.

“This means no more rate hikes, with the fixed-rate cliff doing the work on the domestic economy for the rest of 2023.”

But those looking for rate cuts late this year or early next year will be disappointed, Tim says.

“The easier work on inflation is done. The harder work of reining in services inflation and the domestic economy, is very much a work in progress.

“It will not be smooth or pretty and will require rates stuck here for the rest of this year.”

“Overall the latest data supports our duration-friendly view on markets, but as always levels will determine our risk.”