On-demand webinar: How to conquer the interest rate peak

What’s next for rates and how should fixed-interest investors be positioned? CommBank chief economist STEPHEN HALMARICK and Pendal’s head of government bonds TIM HEXT discuss their views in a new on-demand webinar

Below are the highlights. Watch the webinar here

• Soft landing likely with rate cuts around September
• Bond rally to be sustained
• Watch now: How to conquer the rates peak webinar with CommBank’s Stephen Halmarick and Pendal’s Tim Hext

AS chief economist at Australia’s biggest bank, Stephen Halmarick has better access to real-time consumer data than almost anyone.

The day after the RBA’s February rates decision, Halmarick sat down to share his insights in a webinar with Pendal’s head of government bond strategies Tim Hext.

“The Reserve Bank kept a mildly hawkish tone … at its board meeting,” Halmarick said after the no-change decision.

“Governor Michelle Bullock isn’t yet ready to declare victory against inflation.”  

Official figures, and internal data from the Commonwealth Bank, show the economy is slowing and growth this year is likely to be below trend, he said.

“Household sectors will be under ongoing stress. But business investment intentions are holding up nicely. And state government infrastructure spending is still pretty solid.”

Soft landing

Halmarick believes the Australian economy is heading for a “soft landing”, based on weak consumer spending.

“It’s not till we get the rate cuts through the door that we see consumers start to pick up,” he says.

“We think the unemployment rate by the end of this year will be closer to 4.5 per cent.

“There will be more people employed but there will also be more people joining the labour market.

“It’s important to remember that nobody needs to lose their job for the unemployment rate to go up.”

Halmarick expects inflation to keep falling this year, giving the central bank confidence to cut the official cash rate in September.  

US inflation almost under control

Pendal’s head of government bond strategies Tim Hext says the US economy is close to getting inflation under control.

He believes the first rate cut in the US will happen in May, followed by several more this year.

“The RBA always follows what happens globally,” Hext says in the webinar.

 “This cycle has been all about inflation and that’s what will allow the Reserve Bank to start cutting rates.”

Hext believes there will be three or four cuts within six months of the first reduction in the local cash rate, which he tips will be in September.

Geopolitical factors and other risks

What are the key risks to this scenario?

Halmarick points to geopolitical factors and risks around supply chains, as well as the performance of China.

“Domestically the key risk is the fall in household real income,” he says “The other big issue is the housing market.

“I’m particularly interested in rental markets. Rents are chewing up so much more of people’s money.”

Hext says the list of worries about the economy is getting smaller, not bigger.

One potential concern is the Reserve Bank’s aggressive reduction in its inflation forecast – it expects headline inflation to be 3.2 per cent by the end of 2024.

There’s a risk that won’t be met, says Hext.

And he says oil – via primary and secondary effects – can also have an impact on inflation.

Significantly, the Reserve Bank seems more relaxed about wages.

Both Stephen and Tim agree that the upcoming tax cuts in the middle of the year will not make a significant difference to inflation or growth, relative to the already legislated Stage 3 tax cuts.

What does it mean for fixed income investors?

With a soft landing the most likely outcome, the current bond rally should be sustained, argues Hext.

Last year investors could buy “real yields” on 10-year bonds above 2 per cent – meaning the investor gets 2 per cent above the inflation rate on a government bond.

“That’s very generous for taking very little risk,” Hext says. “It’s not sustainable unless you have a massive productivity boom.

“If inflation heads towards 3 per cent and real yields start to head back towards where productivity is at the moment – somewhere between zero and 1 per cent – then 10-year bonds  should land around 3.5 per cent and the cash rate around 3 per cent.

“Right now we are a bit above 4 per cent so there’s a fair bit of juice left in 10-year bonds,” he says.

“The rally should be sustained. Bonds still represent some value though they’re not as cheap as a year ago.

“Under a soft-landing scenario, it is quite risk friendly. “

Which asset classes should investors consider?

“You should have more duration than normal in bonds, you should be comfortable about owning credit, and it’s not a bad environment for equities,” argues Hext.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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