Tim Hext: In the midst of chaos, staying focused on Australian data is crucial

As the Australian bond market tries to navigate Trump-driven market turmoil, Pendal’s TIM HEXT says it can help to stay focused on the hard data

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AUSTRALIAN equity markets have returned to their August 2024 levels, a time when the US election was beginning to take shape.

Optimism for a business-friendly Trump has turned into pessimism over his seeming willingness to experience short-term pain to achieve his agenda.

Meanwhile, Australian bond markets are trying to figure out what it all means.

For our team, which is focused on interest rates and credit, it means not losing sight of the data and what the picture is for the Australian economy.

Besides the headline-grabbing inflation and employment numbers, the most important release we get every month is the NAB Monthly Business Survey.

It is very timely and comprehensive, and a credit to the soon-to-retire Chief Economist Alan Oster and his team.

So, what did Tuesday’s release tell us? The picture is quite a bond-friendly one.

Business conditions remain below long-term averages and the bounce in confidence we saw in January fell away again.

Surprisingly, retail conditions fell away and remain low, which doesn’t support the narrative of a more confident consumer.

The chart below, courtesy of NAB, highlights the ongoing and consistent moderation in business conditions.

Capacity utilisation continues to moderate and is now almost back to the average level of the last decade (stripping out the Covid fall and surge).

In other words, capacity constraints are not a major problem, which is an important outcome for keeping inflation low.

Secondly, forward orders are yet to bounce back to normal levels. Like the economy, they are slowly improving but indicate ongoing caution.

Thirdly, prices paid remain consistent with easing inflation pressures.

Final product prices eased to 0.5% a quarter – the lowest since early 2021. Labour costs grew by 1.5%, which – adjusting for strong employment growth – is consistent with wage growth around 3-3.5%.

Our quantitative models use several factors from the NAB Business Survey.

The net impact was to trigger a signal to add some duration, consistent with our qualitative view that the current fall in business confidence will feed into lower employment and inflation outcomes.

This may all sound a bit dry and technical in the face of far more exciting hour-by-hour headlines and equity market chaos. However, we always need to make sure we keep an eye on the hard data, especially when it is timely.

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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