PENDAL has been named as a finalist in three categories of the 2024 Money Management / Lonsec Fund Manager of the Year awards.

OUR investment teams were recognised in:

• Australian Property Securities Fund of the Year – Pendal Property Securities Fund
• Global Emerging Market Equity Fund of the Year – Pendal Global Emerging Markets Opportunities Fund
• Australian Fixed Income Fund of the Year – Pendal Short Term Income Securities Fund

Each nominee is thoroughly reviewed by respected investment research house Lonsec.

“The Fund Manager of the Year Awards are a celebration of the very best of the funds management industry and we are again thrilled to partner with Money Management to showcase this year’s finest and brightest,” said Lonsec research executive director Lorraine Robinson.

“We have applied the same rigorous approach we take to researching and rating funds, to evaluating the nominees and choosing winners in each of the group award categories and we congratulate all the finalists announced today.”

Finalists are shortlisted following a meticulous judging process, with winners revealed on June 13.

To view the full list of 2024 finalists, visit the event page.

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Jonathan Choong

• Find out about Pendal Focus Australian Share Fund
• On-demand: tune into Crispin Murray’s bi-annual Beyond the Numbers webinar

THE stock market fell for the third week in a row last week, as investors grappled with rising geopolitical tensions in the Middle East.

This overshadowed positive economic data that previously fuelled expectations of an interest rate cut by the US Federal Reserve.

Fed officials commented frequently throughout the week, but their remarks had little impact on those expectations, which are now firmly entrenched.

Bond yields rose across the board and the US dollar strengthened.

Gold prices continued to climb, along with copper and iron ore.

Oil prices, however, have retraced back to pre-strike levels following the Israeli attack in Syria.

The S&P 500 Index suffered its first six-day losing streak in 18 months, and the NASDAQ took a major hit on Friday night – closing down more than 2 per cent.

The Dow Jones Industrial Average, however, managed a small gain as investors shifted their focus from technology stocks to industrial and financial sectors.

Over the course of the week, the Magnificent Seven lost a collective $950 billion.

Fedspeak

Fed officials hinted at potential interest rate cuts this year, but ongoing inflation concerns are causing some hesitation.

John Williams, president of the Federal Reserve Bank of New York, expressed confidence in the economy and said: “we will likely start bringing rates back to normal levels this year.”

However, Chairman Jerome Powell indicated inflation remains a hurdle.

“The recent data suggests it may take longer than expected” to achieve its goals, he said, adding that the Fed believed its policies were “well-positioned to handle the risks”.

Powell emphasised the Fed’s flexibility, saying it can maintain current restrictions “as long as needed” or ease them if the labour market weakens.

Ultimately, Powell concluded, the central bank would “let the data guide our decisions”.

In other Fed commentary, Fed Vice Chair Jefferson said the economy remains strong and he raised possibility of holding if inflation remains more persistent than expected.

Goolsbee noted that “progress on inflation has stalled”.

Richmond’s Barkin repeated the hawkish messaging, saying CPI data has not been supportive of a soft landing and that the Fed should be patient.

Elsewhere, Mester and Bowman also highlighted there is no rush to cut, with Bowman saying only time will tell if rates are “sufficiently restrictive.”

And Kashkari said rate cuts may need to be delayed until after 2024. Ultimately, notwithstanding the volume of the rhetoric, this week’s Fedspeak did little to move the needle on the market expectations for just two 2024 cuts, likely beginning in September.

Macro and policy

Australia and NZ

Australia’s March labour data was generally in line with expectations – not much of a retreat after the exceptionally strong February print of 118,000 and notwithstanding job ads showing some loosening.

The data remains indicative of a labour market that probably remains tighter than would have been expected a few months ago.

Total employment was down 6,600, with the decline in part-time employment more than offsetting the rise in full-time employment.

Unemployment ticked up to 3.84% but was below expectations of 3.9%, and the participation rate was down more or less in line with consensus.

Hours worked rebounded strongly over the month, up 0.9% month on month.

New Zealand’s headline CPU increased 0.6% quarter-on-quarter in Q1 2024, with the year-end rate easing down to +4.0% year on year.

The outcome was broadly in line with consensus expectations, albeit somewhat above the RBNZ’s standing forecasts from February’s Modern Policy Statement.

Compositionally, tradables inflation was somewhat softer than expected, while non-tradables inflation was somewhat firmer than expected.

Likewise, goods inflation was a bit softer than expected, while services inflation was firmer than expected.

US 

US consumer spending surprised to the upside, rising 0.7% in March.

This strength outpaced forecasts and comes with upward revisions to prior months.

Even excluding volatile items, consumer spending remained robust, climbing 1.1% vs consensus expectations of 0.4%.

Over the last few quarters, consumption has been a consistent contributor to GDP growth and there does not appear to be any sign of weakening in the near future.

This resilience can be attributed to a couple of factors, including a strong rise in real incomes and stock market strength in the first quarter of 2024.

There are some underlying signs of increasing levels of stress on the consumer, with accounts relying on minimum payments increasing past pre-pandemic levels.

Initial jobless claims met expectations and held steady at 212,000, while continuing claims remained relatively flat – suggesting the environment is still stable.

The EVRISI survey of companies in corporate America shows that the aggregate is still in “solid” business conditions.

EU

UK inflation surprised the market, with core CPI dipping slightly to 4.2% but remaining above forecasts.

Headline inflation also came in higher than expected at 3.2%, while Services inflation displayed some resilience – falling only to 6.0%.

While inflation showed some deceleration, it is still front of mind for the Bank of England.

China

There were some signs of stabilisation in China, as Q1 GDP growth beat expectations at 5.3%.

In contrast, retail sales and industrial production missed forecasts.

Despite this, fixed asset investment exceeded estimates, with strong growth in manufacturing and infrastructure.

This suggests targeted policy support is having an effect, however, continued weakness in the real estate market presents a risk.

The EU is expected to announce an investigation into Chinese medical device procurement, raising concerns over future trade relations as it could result in the bloc curtailing Chinese access to its public contracts.

In response to trade practices, President Biden proposed new 25% tariffs on certain Chinese steel and aluminium products.

He also announced an investigation into China’s shipbuilding industry and is considering reinstating tariffs on solar panels.

China’s auto industry has also undergone a dramatic shift, transforming from a net importer to a net exporter in 2023. This rapid rise has sparked anxieties in Western economies.

By facing domestic weakness, China is offloading excess car production through exports at competitive prices.

This aggressive strategy has fuelled trade tensions, with the emergence of the aforementioned tariffs as a potential response.

Australian and US housing

Australia is facing signs of a growing housing crisis.

Record migration is boosting demand, but completions are falling short.

This underbuilding, estimated at a 120,000 annual gap, has been driven by affordability issues.

We are reaching a point where developers cannot make money at current prices and buyers cannot afford more.

This lack of profitability, combined with a shortage of creditworthy contracts, is squeezing supply.

Anecdotally, companies like Mirvac have been keeping sub-contractors on credit support to ensure completions.

In the US, the housing market presents a mixed picture.

March housing starts dropped unexpectedly by 14.7%, while building permits also fell significantly below consensus.

Despite the decline, single family construction continues to trend upwards.

Conversely, apartment starts have plunged 50% from their highs, dragging down overall construction activity which is still at peak levels.

Markets

US earnings season brought some disappointment as positive surprises were below historical trends.

The S&P 500 reported weaker-than-expected earnings for Q1 2024.

The blended earnings growth rate came in at just 0.5%, far below the 3.4% anticipated at the end of the quarter.

While 74% of companies beat earnings estimates, this falls short of historical averages.

Revenue growth also missed expectations.

Some analysts pointed to the strong performance of the Magnificent Seven early in the quarter potentially inflating initial forecasts, but as more companies report, this early boost may start to fade.

In Australian markets it was a sea of red, with losses consistently seen across the market cap spectrum.

Plenty of sectors lost ground by 2% to 3%, with REITs and healthcare suffering the most.

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

Contact a Pendal key account manager here

It will be a bumpy last mile for inflation, but volatility provides fertile ground for opportunistic trades, argues Pendal deputy portfolio manager, insurance and rates, ANNA HONG

• Jobs data indicates a continued bumpy last mile for inflation
• Volatility provides fertile ground for opportunistic trades
• Why bonds, why now? Find out more from Pendal’s income and fixed interest team

THE jobless rate rose only slightly from 3.7% to 3.8% for March – still well below the Reserve Bank’s expectation of 4.2% by June.

Taken in isolation, the number could suggest the economy has not slowed down significantly.

But that’s not the case. The Australian economy grew at a misery 0.2% in the fourth quarter of 2023.

Employment fell by 6,600.

That’s a small reversal to February’s employment gains, but it’s significant against a backdrop of 60,000 working-age adults joining the labour market every month. More on that below.

Reading the unemployment tea leaves

With three months to go, it is unlikely unemployment will reach the RBA’s 4.2% June forecast.

Will that worry the RBA, potentially delaying local rate cuts? Not necessarily.

Firstly, the RBA is not opposed to low unemployment. High unemployment is not a stated objective.

The Reserve Bank will only be troubled by low unemployment if it feeds through to inflation via strong household consumption.

Right now real household consumption is in negative territory and card-spending data shows little sign of a bounce.

It’s unlikely inflation will catch a second wind from the demand side.

The unemployment number does not need to reach 4.2% before the RBA achieves sufficient disinflation to cut rates.

Furthermore, the headline number does not tell the full story.

Net arrivals into Australia picked up pace again in 2024, adding more labour supply.

Some 60,000 working-age adults are joining the labour market every month and hiring intentions have reduced significantly.

The labour market is loosening and will continue to moderate from here.

What does this mean for investors?

It will be a bumpy last mile for inflation as notoriously laggy indicators like unemployment generate noise.

That volatility provides fertile ground for opportunistic trades, however.

At current valuations, we believe fixed-income investors should be positioning now for lower rates later this year.

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About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is Deputy Portfolio Manager, Insurance and Rates, with Pendal’s Income and Fixed Interest team.

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

With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

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About Pendal Group

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

Contact a Pendal key account manager

Pendal’s emerging markets team expects significant interest rate cuts in Mexico and Brazil, increasing their attractiveness. Pendal Global Emerging Markets Opportunities fund co-manager JAMES SYME explains

• Our EM team remains overweight in Mexico and Brazil
• Significant rate cuts expected in both countries
• Find out about Pendal Global Emerging Markets Opportunities fund

ONE of the reasons we maintained overweight positions in Mexico and Brazil was the expectation of big interest rate cuts when disinflation was achieved.

When disinflation did arrive after a strict monetary orthodoxy from their respective central banks in 2021 and 2022, rate cuts were initially slow to follow.

(Though this didn’t prevent MSCI Mexico and MSCI Brazil comfortably outperforming the MSCI EM Index over the last three years.)

With Mexico’s central bank Banxico finally cutting policy rates this month, this piece aims to review the current prospects for policies, economies and equities in the two big Latin American markets.

A broad rate-cutting cycle

Although many developed and emerging market central banks have been cautious on lowering policy interest rates, Latin America has seen a broad rate-cutting cycle that expanded this month to include Mexico.

It’s true that some Latin American central banks that were quick to cut are now turning more cautious – notably Chile and Peru.

But we believe Mexico and Brazil should both be able to deliver hundreds of basis points of cuts in policy interest rates over the next 24 months.

Mexico’s outlook

After inflation rose to 7.6%, Banxico hiked Mexico’s official overnight rate to 11.25% in March 2023. Rates remained at that level until February, pushing inflation down to 4.4%.

In March, Banxico confirmed the beginning of an easing cycle with a broadly anticipated 25-point cut to 11%.

A supporting statement suggested easing would continue through the bank’s next few meetings, which was a positive surprise for markets.

At the time of writing, the consensus holds that Mexican policy rates will decline to 9.5% this year and 7.5% by the end of 2025.

Mexican economic data has softened in recent months, due to a slow in service activity and expectations of reduce agricultural production due to drought.

But overall the Mexican economy continues to do well, supported by a strong US economy.

Mexico’s Purchasing Managers Index (PMI) – a measure of business activity – is well above 50, which indicates manufacturing is expanding.

Fourth-quarter (2023) GDP growth of 2.5% was above expectations and unemployment has declined to near record-low levels.

In addition, we can expect some stimulus ahead of Mexico’s general election, scheduled for June 2.

This economic success comes despite a very high level of real interest rates. A rate-cutting cycle should prove supportive of domestic demand growth and corporate earnings growth.

Brazil outlook

Meanwhile, the rate-setting committee of Brazil’s Banco Central do Brasil unanimously voted for a sixth cut of 50 basis points, bringing rates to 10.75%. (CPI inflation is at 4.5%). A BCB statement shortened the horizon of guidance to only a 50-point cut in May. After this, policy decisions would be data dependent.

Consensus foresees policy rates at 9% this year and 8.5% by the end of next year.

The central bank’s more cautious guidance reflects strong economic growth in the first part of this year.

PMIs look very strong, retail sales and services output have surprised to the upside, and January’s economic activity index rose 0.6%, following an increase of 0.82% in December.

As in Mexico, drought may reduce agricultural output, but not enough to drag down the broader economy.

Lower-than-expected rates

So both countries are experiencing significant rate cuts amid growing economies.

But the Pendal Global Emerging Markets Opportunities team expects a significant positive surprise in the quantum of cuts.

Our model for the interaction between emerging economics and financial markets emphasises reflexivity, where each feeds the other.

We believe the history of booms and busts in individual emerging markets is driven by a process where, generally, everything goes right at the same time, or everything goes wrong at the same time.

In Latin America that tends to mean interest rates overshoot expectations (up or down) through the cycle.

We do not expect this cycle to be any different.

We think interest rates in both Mexico and Brazil will come in much lower than consensus expectations in coming quarters.

This should bring an even more-positive boost to economies, corporate earnings and equity market returns.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Consumer inflation accelerated faster expected in the US this week, while wholesale price rises were more moderate. Pendal’s head of government bonds TIM HEXT explains what it means for investors

• US inflation looks sticky at around 3%
• Bonds are nearing the buy zone
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THIS week’s hotter-than-expected US inflation numbers would be disappointing — but not alarming — for the US Federal Reserve. 

Late last year the Fed glimpsed core annualised quarterly inflation nearing its 2% target. That’s now given way to a pulse above 4%.

In other words, 0.2% monthly results have been replaced by 0.4% results.

Jumps in rent, car insurance and health

What’s driving this jump in US consumer inflation?

Firstly, rents have remained stubbornly high, ignoring lead indicators that suggest some relief.

Rents and “owners-equivalent rents” (an estimation of what homeowners would pay if they were renting their own home) are both growing at 0.4% a month, rather than the 0.2% suggested by the Zillow rent index.

The direction of these numbers is important, since they represent almost a third of US CPI.

We still expect moderation ahead.

Secondly, a number of services have shown unexpected price spikes.

Car insurance and hospital services jumped sharply in March. The former looks strange, but the latter reflects a surge in medical wages over the past year. Either way service prices are drifting up not down.

Finally, oil prices have shown a slow-but-steady rise since the start of the year, now up 20%.

Although this is excluded directly from core inflation, second-round impacts do matter.

Wholesale prices look better

This week we also saw data from the US producer price index, a measure of inflation at the wholesale level.

The PPI numbers showed a more positive story, reflecting ongoing moderation of price pressures in goods markets.

This is partly a commodity price story (oil aside) and also a falling margin story.

But after almost flat-lining late last year, the data is now showing a steady 0.2% pulse, again showing that disinflation is no longer the main story.

On ANZAC Day we will see new data from the Fed’s preferred inflation reading — the broader core Personal Consumption Expenditures Price Index (excluding food and energy).

(This will arrive two days after Australia’s first-quarter CPI numbers.)

We expect a number around 0.3%, the same as last month.

This means 1% for Q1, or 4% annualised — a meaningful pick up from last year.

This all suggests US inflation will be sticky around 3% for a while.

The Fed needs to see 0.2% outcomes on average before starting any meaningful easing.

US Inflation medium-term outlook

Where does all this leave the medium-term picture? 

We are not drifting back into high-inflation territory. For that we would need to see new supply shocks.

Supply chains are normal, wage growth is moderating and margins are still falling.

Even the US fiscal pulse, which remains very strong, is showing some small moderation. So patience is required — and the US Fed has plenty of that.

Economic commentators can choose from a variety of recent Fed speaker quotes to fit their own outlook.

But the one I like best is from New York Federal Reserve governor John Williams.

There was no need to adjust rates in the “very near term” Williams said on Thursday.

“I expect inflation to continue its gradual return to 2%, although there will likely be bumps along the way, as we’ve seen in some recent inflation readings.”

This would allow rate cuts later this year.

Bonds nearing the buy zone

A move higher in yields is seeing opportunities to look at duration once again.

In Australia, the US sell-off has seen our 10-year government bonds near the cash rate and semi governments once again above 5%.

While the US won’t be easing near term, the European Central Bank still looks disposed towards a June rate cut.

Inflation will be sticky above targets for some time. Our core view is inflation over the next five years will average 2.5% in the US and 3% in Australia.

However, this is not consistent with 5.5% and 4.35% cash rates medium term.

In our view, investors should position now for lower rates later this year.

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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.

Find out more about Pendal’s fixed interest strategies here

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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.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week according to Aussie equities analyst ELISE MCKAY. Reported by portfolio specialist Chris Adams

• WATCH NOW: Crispin Murray’s latest bi-annual Beyond The Numbers webinar
• Find out about Pendal Focus Australian Share fund

A NUMBER of new data points show the economy is holding up just fine.

Surveys of manufacturing purchasing managers are heading higher globally.  This is supportive for global growth and strength in commodities, particularly in a tighter supply environment. 

In the US, the Institute for Supply Management (ISM) manufacturing PMI index entered expansionary territory for the first time since September 2022. A similar manufacturing survey in China also delivered its highest reading in 12 months. 

Initially this manufacturing strength was taken negatively. But as we received ISM services and labour data, the market changed its tune. 

Payrolls were a big beat, but this was offset by a rise in labour force participation and moderation in wages. This points to an economy with big supply-side tailwinds, supporting the ability to grow strongly while keeping inflation in check and avoiding overheating. 

Progress on inflation should keep the US Federal Reserve on track to cut rates this year, though good economic data may limit the pace of the cutting cycle. This scenario remains positive for equities.

There seems to be differing opinions emerging at the Fed, with a lack of consensus on whether the strength of the economy being supply or demand driven. Recent data suggests the former.

Consensus has historically been important. There have been very few dissenting votes during Powell’s tenure.

The market is now pricing a 53% probability for a June cut. The total of implied expected cuts for 2024 has fallen to 67bps.

This week we will see US CPI data, minutes from the rate-setting Federal Open Market Committee (FOMC), European Central Bank (ECB) policy decisions and the start of US first-quarter earnings season.

The ECB is expected to start rate easing cycle in June rather than this month.  

The S&P 500 fell 0.93% last week while the S&P/ASX 300 was down 1.55%.

US economics and policy

Fed speak

Since Fed chair Jay Powell’s last dovish speech on March 20 we’ve heard differing opinions in comments from several FOMC members. 

There are three key areas of focus:

1. A lack of consensus on whether (disinflationary) supply or (inflationary) demand are driving economic strength. 
2. Differing views on how to balance the dual mandate of maximising employment and keeping inflation stable. The question is whether the Fed should accept a longer path back to 2 per cent inflation to ensure a soft landing.
3. Timing risk: If the Fed can’t justify cutting rates in June, it may have to wait until March 2023 — after the US presidential election.

Does a decision to cut rates need to be unanimous?  No, but reaching a consensus is desirable and Fed has a track record of bridging the gap between those who want to move versus those who prefer to wait. 

In 2015 when moving off zero rates, the Fed managed to reach consensus when its promise of “gradualism” was enough to get all members on board.

US payroll data

March non-farm payrolls beat expectations by a huge margin, rising 303k versus 214k expected. The three-month average gain of 276k / month is the highest level since March 2023. 

However, a rapid rise in US immigration has reduced the effectiveness of non-farm payroll growth as a historical indicator, with an estimated 200k / month increase in labour supply versus a historical growth rate of 100k / month.

It’s more relevant to look at other measures to determine whether the labour market is tightening or not. 

On such measures, the unemployment rate down 3bps to 3.83% and average hourly earnings (AHE) were largely in-line with expectations. 

The unemployment rate benefited from a 498k surge in the number of employed people. The labour force participation rate increased to 62.7% with prime age sitting at 83.4%. 

AHE increased 0.3% month-on-month and 4.1% year-on-year, continuing its downwards trend. Though it is still running ahead of the 3.5% rate estimated to be compatible with the Fed’s 2% inflation target. 

US manufacturing health

The ISM services index — a survey that gauges how busy factories are and how confident purchasing managers are about the future — fell to 51.4 in March. That was below expectations of 52.8 and down from 52.6 last month.

Typically a score of above 50 indicates manufacturing is expanding and the economy might be growing, while scores below 50 suggest a slowdown, with fewer orders and production.

About three quarters of the decline came from lower supplier delivery times. Business activity improved slightly from 57.2 to 57.4 — its highest level in six months. 

Importantly, we did see “prices paid” drop to a four-year low of 53.4 (down from 58.6) suggesting upward pressure on prices from labour cost is easing further. 

This has also been a good lead indicator for underlying core personal spending (excluding housing), suggesting a return to pre-Covid inflation levels are on the way.

Bond yields

Bonds moved 19bps higher last week off the back of strong payrolls. They are up 52bps in 2024.

This move has been driven almost exclusively by better growth expectations in 2024. 

US prices back on track

The Fed’s preferred read on inflation is the Personal Consumption Expenditures index, which tracks the prices Americans pay for everything from groceries and petrol to rent and haircuts.

The latest data was released on Good Friday.

Core PCE (which excludes volatile measures such as food and energy prices) rose by 0.26% in February — which was in line with consensus expectations of 0.3%, and up 2.8% year-on-year. 

January data was revised up from +0.42% to +0.45%, driven by medical services inflation from the Producer Price Index, which tracks business costs.

This brings annualised inflation for the last 3 months to 3.52%. 

Core goods inflation accelerated 0.31% after three consecutive negative prints, primarily driven by a jump in prices for video and IT equipment. 

Core services (excluding rent) increased 0.18%, but three-month annualised is now tracking at 3.7% due to the big January print.   

US consumer spending

Personal income grew 0.3% in February — slightly weaker than expected. 

Consumer spending rose 0.8% (versus consensus of +0.5%) in February, with much stronger services consumption (+0.9% in February and +1% in January).

Airfares, recreational services (such as gambling) and financial services were the biggest drivers of services spending. In contrast, goods consumption only increased 0.5%.

US economic growth

The Atlanta GDPnow index monitors a range of economic data such as manufacturing figures, consumer spending and trade numbers, to create a real-time estimate of GDP growth.

The latest data from the Federal Reserve Bank of Atlanta estimates US GDP growth is tracking towards 2.5% for the first quarter of 2024 (at April 4).  

Meanwhile the Evercore ISI Trucking survey has improved to the highest level since October 2022 and is showing signs of stabilisation, although still depressed levels by historical standard. There is usually good correlation between trucking survey and US real GDP growth.

Destocking of inventories by retailers appears mostly in the rear-view mirror although, there are not signs of significant restocking activity either.

Surveys of US companies by researcher Evercore ISI are now back in the “solid” 50-55 range on a 100-point scale, having rebounded from the “struggling” 45-50 band.

Global growth

Inflation is coming down in most economies around the world.

Eurozone inflation, having peaked at 10.6%, is now back to 2.4% and within its “normal” historical range.

As mentioned above, surveys of purchasing managers (PMIs) have been heading higher, which is supportive for global growth and strength in commodities, particularly when combined with a tighter supply environment. 

• In the US, the ISM manufacturing index was 50.3 for March 2024 (versus consensus of 48.3) and was in expansionary territory the first time in since September 2022.
• China’s NBS manufacturing PMI picked up to 50.8 in March 2024 from 49.1 in February, the highest reading in 12 months and ahead of consensus.  This was well received by the market with the Hang Seng Index rallying 3%. 

Historically, copper is the biggest metal beneficiary of re-accelerating global manufacturing PMIs, with an average 25% move over the 12 months following a PMI trough, slightly ahead of zinc and nickel. 

Unemployment rates in most major economies have also remained low and in check, with some signs they are beginning to rise.

Australia

Inflation data for February came in below expectations, moderating to 3.4% (consensus at 3.5%) and unchanged from January. This is the equal slowest since November 2021. 

Goods inflation eased to 2.9% year-on-year (from 3.1%) but services lifted to 4.2% (from 3.7%). 

Markets

It was a generally soft week for markets with bright spots among some commodities such as oil, copper and gold. 

Consumer discretionary (-2.8%) was one of the worst-performing sectors in the US. Trading updates caused concern despite strength in recent consumer spending and labour-market data.

Investors are concerned that recent management commentary from consumer-facing companies suggests some signs of weakness.

Luxury goods house Ermenegildo Zegna was down 15% on Friday as they guided first-quarter revenues lower.

Costco missed consensus US sales estimates for February. Lulu Lemon, Nike and Ulta have all recently issued disappointing forward guidance.

Last month, McDonalds called out a “challenging consumer environment” while Darden Restaurants recently missed on revenues.  

Oil was up 4% last week and over 18% for the year, after an Israeli strike escalated worries of a broader Iran-Israel war. This is feeding into gasoline futures which are up 80c this year — not helpful for inflation.

Global supply of public equities is getting smaller, with a net decline of $120 billion so far this year, compared with a total net decline of $40 billion in 2023.

The number of listed companies in the US has fallen from >7k in 2000 to <4k today. 

US earnings season is due to start next week and expectations are set for a bullish 2024.

Consensus expects 3% year-on-year EPS growth for the aggregate S&P 500 index, a deceleration from the 8% growth posted in 4Q23 earnings season.

This quarter’s expected growth rate is the highest pre-season bar set by consensus since Q2 2022.

Notably, aggregate results have exceeded pre-season EPS growth estimates in each of the previous four quarters by an average of 4%.

Bottom-up consensus expects the S&P 500 will post 10.9% net margins in Q1, a 28bps quarter-on-quarter contraction but a 2bps year-on-year expansion.

Energy, materials, and health care are expected to post year-on-year margin contractions >100bps.

The 10 S&P 500 stocks with the largest market caps are expected to expand margins by nearly 400bps year-on-year while the remaining 490 firms in the index will see margins fall by 57bps.

Looking back at Q1 2024 performance, areas like AI, copper and obesity drugs all performed well and are expected to continue to be focus areas for the remainder of the year.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

The RBA looks set to re-build our financial system’s plumbing. Pendal’s head of government bond strategies, TIM HEXT, explains what it could mean for investors

• The RBA has announced the “Ample Reserves” system
• It will set a price for Open Market Operations and offer unlimited quantity 
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE plumbing of Australia’s financial system is a bit like the plumbing in your house – of little interest until something goes wrong.

For those few who do take an interest in the RBA and our financial system’s plumbing, the Assistant Governor Chris Kent gave a speech on Tuesday: “The Future of Monetary Policy Implementation”.

By the end of this year, he explained, Australia will have a new system called “Ample Reserves”.

In short, the central bank will set a price for “Open Market Operations” (repos) and offer unlimited quantity – instead of setting the quantity and letting the market determine the price, as was the previous system.

Banks have been flush (so to speak) with liquidity since early 2020, courtesy of RBA quantitative easing and the term funding facility over the pandemic.

These are now slowly rolling off, reducing excess reserves in the system.

The RBA is worried that the pre-pandemic “corridor and low reserve” system may not work so well.

That system relied on the RBA accurately forecasting government inflows and outflows into the system (think taxes and welfare payments) and offsetting them by adding or draining the cash back into the system through repos and reverse repos.

READ NEXT: Private credit has its place in portfolios. So do bonds. In her latest article, Pendal head of income strategies Amy Xie Patrick explains why, as rates normalise, investors should remember that those roles are different. 

You lend them securities and they give you cash that you then pay interest on or vice versa.

The corridor meant banks could always borrow or lend unlimited funds with the RBA at 0.25% above or below target cash, but hardly ever did.

With Ample Reserves, banks can go to the RBA and offer unlimited securities to repo in return for cash (OMOs) at a pre-set margin to the official cash rate.

The price and frequency of these operations are yet to be determined but look like at least weekly and something like the target cash rate plus five basis points (currently 4.40%).

The RBA will release more details later in the year after market consultations.

So, what does this mean for investors?

The good news for leveraged portfolios is that there is now an “ample” supply of central bank liquidity at a reasonable price.

For investors, the good news is that overnight cash should eventually drift back towards target cash levels rather than sit at the ES level.

This would mean closer to 4.35% than 4.25% at current cash targets.

The bad news for investors, however, is that bank bills are less likely to drift too far above cash again.

Also, for relative value funds, government bond baskets (where bonds trade to futures) are less likely to get too cheap again.

Overall, it is a new era for the RBA.

It is not only temporarily moving out of the asbestos-ridden 65 Martin Place while expensive and long overdue renovations are undertaken, but it now has a new way of ensuring system liquidity is always rock solid.

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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.

Find out more about Pendal’s fixed interest strategies here

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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.

Contact a Pendal key account manager

Pendal assistant portfolio manager ANNA HONG unpacks the latest monthly CPI data and highlights some of the key takeaways for investors

• The last mile will not be a smooth run
• There remains optimism that inflation will fall closer to 3% by mid-year
• Why bonds, why now? Find out more from Pendal’s income and fixed interest team

AUSTRALIAN monthly CPI of 3.4% year-on-year (YoY) came in a touch lower than market consensus.

Meanwhile, trimmed mean CPI (with the top and bottom 15% cut off) came in at 3.9%.

Though the monthly CPI shows clear signs of disinflation, it appears that the last mile will not be a smooth run.

The Reserve Bank of Australia references the quarterly CPI measure in its decision-making, and February’s numbers update the quarterly CPI basket.

We expect headline and underlying inflation, released in late April, to be around 0.8% for Q1.

It is evident that the rate hikes have taken a toll on the Australian consumer, with real consumption in negative territory.

Goods inflation is back below 2%, while services remains sticky – above 5%.

The table below highlights improvements over the past six months along with the need for further falls.

We have also had important updates in a few key service areas this month.

Housing

Rents remain elevated at 7.6% (YoY), which is not a surprise given the apartment supply challenges driven, in part, by the current immigration wave.

Adding to this is the 4.9% (YoY) increase in new dwelling prices (the cost of building) in February.

Builders have been able to pass higher labour and material costs onto homeowners.

Education

Education prices are measured only once a year (in February) and represent 4.4% of the CPI basket.

Education prices rose 5.9% (YoY) over February, with the main contributor being primary and secondary schools passing on the high wage rises for teachers announced in late 2023.

Teachers’ wages will show more moderate growth in 2024, however, so next year’s number should be lower.

Looking ahead, tertiary education inflation remains high, as lags in indexation came through this February.

Health

The news on the health front (which is 6.2% of the CPI basket) was better than education.

Health fund rises approved for April (also measured once a year in the CPI) were set at an average of 3.1%.

The RBA needs services inflation at or below 4% before it will be comfortable with inflation.

What does this mean for investors?

It was unlikely that the RBA was going to cut in the first half of 2024 – these numbers and the slowing of the disinflation impulse all back this up.

However, there remains optimism that inflation will fall closer to 3% by mid-year, which would allow rate cuts from August.

In the meantime, movements from the US Federal Reserve in between will also play a role in the last mile.

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About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

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

With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

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About Pendal Group

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

Contact a Pendal key account manager

Private credit has its place in portfolios. So do bonds. As rates normalise, investors would do well to remember those roles are different, writes Pendal head of income strategies Amy Xie Patrick

• Asset classes like private credit have important roles to play in portfolios
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

INCREASINGLY I find myself a lone voice on conference panels speaking in favour of public market debt offerings such as bonds.

When I look left and right, I see experts in private credit, private equity, unlisted property and venture capital.

Depending on your investment goals, there are solid reasons for each of these to feature in a portfolio.

But I generally disagree with the use of private debt to replace the job that active bonds are supposed to do in a portfolio.

What is private debt (otherwise known as private credit or direct lending)?

Private debt is a type of credit.

Credit is a sub-asset class of fixed income where companies are borrowers and investors are lenders.

In the public debt space these loans take the shape of bonds or syndicated loans.

Both are freely-traded instruments whose values may change with every transaction. Sometimes, in the absence of any transaction, prices can change as market conditions change.

On the other hand, private debt is lending undertaken directly between companies and investors.

Borrowers are typically companies looking for more advantageous terms than they can get from a bank.

These companies may face more onerous bank lending terms due to lower credit quality, an unproven business concept or the riskiness of a project.

Investors include private debt funds, insurance companies and so on.

In Australia, private debt funds benefit from the conservative nature of our major banks. This leaves a significant slice of smaller and medium-sized enterprises “unbanked”.

It also provides a return opportunity for private debt managers who have the risk appetite and capability to assess and manage the risks.

As a result, private credit portfolios are able to generate higher levels of yield and income than portfolios of investment-grade corporate bonds.

Unprecedented growth

Five-to-ten years ago most private debt funds in Australia would have had only 20-30% exposure to the residential property market.

An unprecedented period of strong inflows into these funds followed as end investors searched for yield in a low-interest-rate world.

Today, the average private debt portfolio in Australia would have 50% or more exposure to the residential market.

This alters the risk and compositions of these portfolios compared to more diversified positions a decade ago.

Growth in these exposures has been forced rather than intended, since there haven’t been enough non-property opportunities to participate in.

In the world of equities, small and micro-cap fund managers are usually frank about the capacity of their offerings.

Good managers will cap the growth of their funds to sizes commensurate with the liquidity and the likely pool of good opportunities in their market.

Private debt funds have generally not done this in the face of strong inflows.

As a result, I expect the overall quality of portfolios will continue to get dragged by the concentration in property.

No volatility

Lack of market volatility is another attraction of private debt funds over publicly traded bonds.

This was a particularly strong draw after 2022 when most asset classes other than cash and oil were under water.

Why is there no volatility? Because there is next to no liquidity in private debt.

From time to time, private debt positions may transition between different fund managers. But these are bilaterally arranged deals unseen by the rest of the market.

Even if a manager sells a position from her portfolio to another manager at a sub-par value, it does not force every other private debt manager to take a paper loss on similar assets in their portfolios.

By no means does the red line in Figure 1 (see below) paint the lived experience of every private debt investor.

But it reminds us that just because something doesn’t move, that doesn’t mean it’s sellable at the price it was bought.

Figure 1: What if private debt were publicly traded? US high yield and an index of asset managers who specialise in private debt

Source: Bloomberg

Of course, no private credit index has enough history to tell us anything reliable about the true volatility of the sub-asset class.

But we can consider the red line above as a proxy.

It tracks the share prices of listed companies whose main business is in direct lending and private credit.

It’s no surprise that the undulations of the red line follow those of public high-yield markets. But the draw-downs are deeper, reflecting greater risks in private debt.

Historically, this has been true of every private version of asset classes, from debt to equity to property.

A cyclical asset class

The market volatility makes sense when you see that private debt is a cyclical asset class.

Figure 2: The cyclicality of private debt

Source: Bloomberg

This direct-lending data comes from the Cliffwater Direct Lending Total Return Index.

The index measures the unlevered and gross-of-fee performance of US direct loans by looking at the asset-weighted performance of the underlying assets of the direct-lending companies.

The ISM manufacturing employment index signals cyclical trends in the overall economy. When overlaid to the year-over-year returns of the Cliffwater index, we can see the returns to direct lending follow the cycle.

The data for the latest periods of returns from US direct lending are not yet available. But we can see from the ISM index that the trajectory of those returns are likely to be headed lower as the economic cycle softens.

Government bonds, on the other hand, have always rallied into every economic recession.
There has been a long-held relationship between the quits rate and wages.

Valuations

Rather than speculate about private debt valuations and methodology, I’d look to recent findings from KBRA Direct Lending Deals on the state of valuations ahead of defaults among the US community of private debt managers.

The same data is currently unavailable in Australia, but the KBRA analysis references a US$1.7 trillion industry.

The study addresses a key assertion of the private debt industry that they are in stronger lender positions than banks.

The reasoning includes closer relationships with companies, more senior positions in the capital structure and stronger protections when borrowers get into trouble.

If that were true, you should expect that recovery rates on defaulted positions in private credit portfolios should have an average value in excess of what is achieved in public bond and loan markets.

The KBRA results showed the opposite.

Private credit firms were able to recover only 48 per cent of the value of loans made to defaulted companies over the last year, compared to 55 per cent in syndicated loans.

The seniority and protected position assertions may also lead managers and valuation agents to be overly optimistic when assessing potential loss in their portfolios.

Figure 3: Mind the gap. Private vs public debt valuations ahead of defaults

Source: Bloomberg

As Figure 3 illustrates, in the three months leading up to default, direct-lending portfolios tend to mark troubled assets at a higher value than both the markets of leveraged loans and high-yield bonds.

The phenomenon may be more simply explained by the wisdom of crowds.

Given many market participants are looking at the same thing in leveraged loans and high-yield bonds, there are more opinions weighing in on what the right asset value should be at any point in time.

In private debt, it’s usually just the opinion of the manager and a third-party valuation agent.

The dangers of private debt replacing traditional fixed income

Even the most conservative private debt managers in Australia will have a higher level of credit risk through their portfolios than a bond or credit manager.

In addition, even the most liquid of private debt funds will not be able to offer daily liquidity for their clients.

I highlight these two points because I think they get to the heart of how most investors see the role of fixed income in their portfolios.

At the very least, it is a part of the portfolio that they don’t expect to worry about when their equities, property and Bitcoins are falling out of bed.

Most investors also expect to be able to tap their fixed income allocations for some liquidity once their cash has been used up.

In orderly normal market sell-offs, high-quality investment grade bonds offered for sale by one manager will usually find a home with another – even if it’s at a lower price that the former would like.

Perhaps the same can be said of private debt, though the discounts would have to be far steeper.

This highlights the need for some non-credit fixed income in the portfolio as well. This is where exposure to government bonds comes in.

Government bonds don’t have to be defensive.

The experience of 2022 reminded markets that bonds move as much with inflation as they do with growth. Since inflation was the bigger problem then, bonds could not rally as equities sold off.

If growth becomes the bigger problem, bonds should perform – just as they have in every recession in the past. This has been regardless of the starting point in yields.

Recession is the worst-feared scenario for equities, property and probably Bitcoin. It is also the worst-feared scenario for leveraged and private credit because corporate defaults skyrocket.

As KRBA’s findings have shown, the relatively benign valuations on private debt portfolios may only mask the impending shock to come in such an environment.

With most private credit funds requiring investors to provide two-to-four months’ notice on capital redemptions, that may be just the perfect amount of time for the value of their investments to go from whole to sub-par.

Conclusions

Asset classes such as private credit have important roles to play in portfolios.

They provide a way to amplify returns – and in some cases even diversify the sources of those returns.

In times of ultra-low interest rates, the space they occupy in portfolios have grown to crowd out traditional fixed income.

But now that interest rates have normalised, it is time to ask whether traditional fixed income needs to find its way back in.

If fixed income is supposed to be the true diversifier – with an ability to protect or defend in times of economic stress – private debt will not fulfil that purpose.

If fixed income is supposed to be a source of liquidity in times of market stress, a greater consideration needs to be made for government bonds.

That liquidity was available even in the depths of severe financial crises.

It proved invaluable for investors who used that flexibility to take advantage of beaten down prices in other asset classes.

Again, private credit will not serve investors well who are in need of that liquidity or flexibility in those stressed market environments.

It’s been easy to get away with replacing private debt for traditional fixed income for a decade. Let’s not wait for a deeper episode of economic stress to remind ourselves of the value of bonds.

Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• NEW: Watch Crispin Murray’s bi-annual Beyond The Numbers ASX outlook

THE first central bank domino fell last week.

The Swiss National Bank pushed through a surprise 25bp cut to 1.5%, pre-empting expected moves by the US Fed and European Central Bank as soon as June.

The Fed kept rates unchanged but reiterated that it expects three cuts this year.

The ECB continues to flag June as the month by which it should know whether to cut. And even Bank of England hawks have dropped their push for more hikes.

It is small wonder then that the Reserve Bank of Australia walked back commentary warning of further hikes.

In short, most central banks appear increasingly poised for a scramble to cut rates, despite plenty of macro-level data suggesting there’s no need to do anything quickly. 

Against that backdrop the S&P 500 rose 2.31% (its best week since January) and hit another record high – its 20th year-to-date.

The S&P/ASX 300 also managed reasonable gains, up 1.29%.

Though neither matched Japan. The Nikkei jumped 5.6% on further signs the economy was strengthening – forcing the Bank of Japan to raise rates for the first time in 17 years.

Bonds rallied on higher rate-cut expectations, with yields on longer-dated Treasuries ending the week on lows.

It’s been a volatile month and a tough quarter for commodities, though most moved higher last week.

In particular lithium spodumene rose 18.2%, recovering from an oversold position.

Oil ended the week flat, giving up mid-week gains. Brent crude remains up 11% YTD, but lower gas prices and freight rates are acting as an inflationary offset.

Commodity Trading Adviser positioning in commodities was unchanged from the previous week with strategies continuing to hold “max long” positions in oil and gold, silver and copper.

Rate expectations

The US Fed remains odds-on to cut in June. Expectations were up 19% last week despite better-than-expected economic data released after the meeting.

We also note the Core Personal Consumption Expenditures (CPE) index – the Fed’s preferred gauge of inflation – is accelerating.

In Australia, stronger unemployment data offset the RBA’s shift to a more neutral stance, with a full cut now not priced in until November (versus September previously).

However, if the Fed and ECB cut in June, pressure will mount for the RBA to follow sooner.

US outlook

The Fed held rates unchanged for the fifth meeting in a row, as expected.

More importantly, it stuck to its view of three cuts by year-end. This was the main driver of a positive market reaction, though we recall the market started the year pricing in seven cuts.

As has previously been discussed, US inflation continues to move in the right direction despite the odd bump.

The Fed “judges that the risks to achieving its employment and inflation goals are moving into better balance”, according to Fed chair Jay Powell.

However it was a lot closer than the market reaction suggested.

Changes in the “dot plots” of each member’s expected rate levels very nearly skewed the median towards two cuts – which would likely have driven a different market reaction.

The market was also happy to shrug off a reduction in expected cuts next year from four to three, as well as a lifting in long-term rate expectations from 2.5% to 2.6%.

Other key changes to 2024 forecasts included raising expected inflation from 2.4% to 2.6%, expected GDP from 1.4% to 2.1% and cutting expected unemployment from 4.1% to 4%.

Powell also said it would be appropriate to begin tapering so-called quantitative tightening “fairly soon”.

Better GDP and employment forecasts weren’t the only indicators that the US is economy is doing well.

In data released after the Fed meeting, existing home sales rose 9.5% month-on-month to 4.38 million – the highest point over the past year and ahead of an expected 3.95 million.

The Conference Board Leading Index (a composite index that averages ten key economic variables) also rose 0.1% for the month, versus an expected 0.1% fall. It was the index’s first rise since February 2022.

As we highlighted back in November, this index has bottomed at a median of 61 days before the end of every recession since the 1969-70 downturn – and stocks have gained a median 23.4% in the year after these troughs.

The most recent trough was April 2023. Since then the S&P 500 is up 26%.

In short, the data is coming in stronger. However, as one commentator put it: “This is a Fed that wants to cut rates.”

The next Fed meeting is May, though the market is only pricing in a 16.5% chance of a cut then.

Instead, committee members are likely to wait for more CPI prints. Three more are due before the June decision, with the last one the day before their next meeting.

It seems inconceivable that the Fed could cut in November given the US presidential election.

So that leaves just four meetings (June, July, September and December) to put through three cuts.

Australia

There were no surprises from the Reserve Bank’s mid-week meeting (rates were held at 4.35%), though we noted a change in language “in response to some data that makes us more confident about the path we are on”.

The RBA effectively walked back commentary warning of further hikes, by “not ruling anything in or out” rather than the previous “a further increase in interest rates cannot be ruled out”.

Semantics maybe, but there’s no doubt the previous stance was increasingly at odds with other central banks eyeing rate cuts sooner.

At this point the Fed is rated 85% chance of a cut by the end of June, the ECB above 90% and the RBA at only 40%.

There are three factors affecting the outlook for Australian interest rates:

1) Labour market challenges remain

One issue the RBA has to contend with is continued strength in the labour market.

Data after the RBA meeting revealed unemployment declined to 3.7% in February, down from 4.1% prior (4% expected). Some 116,500 jobs were added in the month versus 40,000 expected (500 prior).

While the data can be volatile, it nevertheless challenges a dovish view and sent rate cut expectations lower.

We note that is a parallel with the Fed, where Powell has previously noted that “in and of itself, strong job growth is not a reason for us to be concerned about inflation”.

This is only an issue if workers are spending and driving up inflationary pressures. Still, it is something to watch.

2) Then there’s the tax cuts

Some $20 billion in annual income tax cuts will begin kicking in from July 1.

This is clearly inflationary – some estimates say it is worth two-to-three rate cuts – and may well encourage the RBA to pause while gauging the inflationary impact.

3) Borrowers are coping

Commentary from the RBA Financials Stability Review added more weight to a hold-for-longer view.

Despite mortgage repayments rising 30-60% since May 2022, borrowers are seen as being able to cope if rates stay higher for longer.

While arrears would rise, they are expected to remain low at less than 1% in terms of home loans 90 or more days in arrears.

Japan

As expected, the Bank of Japan became the last central bank to exit the era of negative interest rates, raising the benchmark to an eye-watering 0.0-0.1% from -0.1% – the first increase in 17 years.

The move marks a step back towards mainstream central bank policy after decades of experimentation.

While negative rates no doubt helped stem the tide of deflation, ultimately it was quantitative easing, Covid and Russia’s invasion of Ukraine that drove inflation back above 2%.

As a former BOJ director in charge of monetary policy said: “the negative rate did nothing, nothing at all” to stoke inflation.

Interestingly, the start of Japan’s last three hiking cycles (going back to 1986) has preceded a global recession.

Though we note that is clearly at odds with most of the current macro data.

Markets

It was a good week for nearly all sectors in the US last week.

Tech stocks continued to do a lot of the heavy lifting – apart from Apple, which fell on an anti-trust investigation.

Artificial intelligence was again front and centre with Nvidia up for the 11th straight week after holding its GTC event (the ‘Woodstock of AI’) which packed in some 11,000 people.

Industrials also did well with bellwether FedEx reporting a third-quarter beat.

Real estate was weaker, with Equinix down on a short report.

Elsewhere Nike and Lululemon reported weaker results – the latter warning it had seen a shift in the shopping behaviour of its high-end US consumers.

Overall though it was a good week, pushing the price/earning multiple back to January 2022 levels.  Materials led in Australia, offsetting weakness in utilities and consumer staples.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

 

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