Tim Hext: Why Pendal favours a July rate cut

Here’s what the latest employment data means for the market, according to Pendal’s head of government bond strategies TIM HEXT

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THE latest employment data was released today.

Headline employment was slightly weak, with a loss of 2,500 jobs – payback from the very high 87,000 increase in April.

Given volatility from month to month, we look at a three-month rolling average, which remains at around 35,000 jobs – enough to soak up new job entrants.

More importantly, the unemployment rate remains stuck at 4.1%, which the same result for every month so far this year.

Stability like this is almost unheard of.

Currently, any sharp move in jobs is matched by a similar decent move in the participation rate – again showing the limitations of the survey.

The good news for the job market is that full-time job growth is exceeding part-time growth.

This means less spare capacity in the labour market, as some of the 25% of part-time workers who say they are seeking more hours looks like they are finding them through full-time jobs.

This reduces underemployment and, in turn, what is called the underutilisation rate (unemployment plus underemployment).

The underutilisation rate now sits at 9.9%. This is the lowest since early 2023 and almost 1% lower than early 2024, highlighting a healthy job market. If we look back a decade, it is almost 4% below pre-Covid levels.

Our base case

We are less than three weeks away from the RBA’s July decision.

The RBA has forecast unemployment to be at 4.2% by the end of June. This data on its own would indicate no cut. In fact, unemployment is still below its estimate of full employment.

However, weaker consumption data since the May cut and the fact that the RBA looked closely at doing 0.5% in May means our team favours a July rate cut.

Right now, the market is pricing an 80% chance of a cut.

We do not expect it to move far from here pre-July, absent global events. Terminal cash is still priced at 3% by March 2026.

We still like duration despite market pricing. While optimists cling to the hope that we will make it through July without tariffs disrupting markets again, it is not something we think is a base case.

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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