Tim Hext: It’s all systems go for the RBA to cut

While it’s all systems go for a rate cut next week, caution will be the RBA’s message, writes Pendal’s head of government bond strategies TIM HEXT

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THE final pieces of the economic puzzle before the Reserve Bank’s rate decision next Tuesday have now been released.

The data paints a mixed picture, among the wider chaos of April.

The NAB Business Survey for April, our favourite trove of leading indicators, showed an economy slightly easing.

Business conditions remain below average, driven largely by falling profitability. Manufacturing and retail remain soft, with Victoria still the weakest.

Of more interest was capacity utilisation – it is finally back at long run averages, the final post-COVID indicator to resume normal transmission.

Here is the graph, courtesy of NAB.

The second piece of data was the Wage Price Indicator (WPI) for the March quarter.

This came in at 0.9%, slightly higher than expected as several higher public sector agreements hit. After the surprisingly low 0.7% Q4 number, it is fair to characterise wages as growing around 3.2-3.4% annually, consistent with RBA forecasts.

This is near an ideal outcome for the central bank, as slightly positive real wage growth should support consumer spending without impacting inflation.

The annual Minimum Wage decision will be handed down by the Fair Work Commission in early June and should see a similar outcome.

Finally, we got the April employment numbers today.

As always, volatility was high – with a large 89,000 job growth, but no change to the unemployment rate as participation also shot up.

No great explanations were forthcoming from the ABS, where I imagine corralling 26,000 people to fill in their survey each month must be the least wanted job among the statisticians.

When the RBA board sits down on Monday and Tuesday next week, they are highly likely to land on a 0.25% rate cut, as the market now prices.

Relative calm from the global picture in May has ruled out a larger cut, while the well-behaved inflation numbers make no change a highly unlikely call.

The RBA is in a good position right now.

A quarterly rate change cycle, post-quarterly inflation numbers, seems a cautious and easy path as inflation settles down in the 2-3% band.

We still look for cuts next week and in August and November taking cash rates to 3.35% (or somewhere near ‘neutral’). Markets should still lean in for a little bit more given the global picture.

So, what is the market pricing now?

The chart below shows a cash rate near 3.3% by year-end, up from an expected 2.9% only a few weeks ago.

As a result, we are once again building some overweight duration positions.

The market is not overly cheap, and exuberance may see it get a bit cheaper. However, for the first time since March, pricing allows for a more sensible risk/reward overweight duration position based off Australian fundamentals.

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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