The Point

Consumers and business head in different directions

Consumer and business sentiment are heading in different directions according to the latest data.

What’s going on?

Early last year consumer confidence boomed as we escaped from lockdowns with money in our pockets, says Pendal’s Tim Hext.

“Sentiment hit an all-time high in April 2021. Weighed down by rising prices and rate hikes we’ve since plunged almost to the March 2020 low.

“For business, however, it’s hardly looked better. An NAB survey sees business conditions at 20, not far off the April 2021 high of 30 (it averages around 5).”

So far rate hikes have been manageable for consumers, but the next 1% this year will start to bite — heavily for some, says Tim.

Meanwhile tight supply of goods and services means businesses are able to pass on higher costs, maintaining margins and seeing conditions as strong.

“Of course, consumers and business can only be out of step for so long — and 2023 will see a reckoning.”

Crispin Murray: What’s driving the ASX this week

The big debate is whether the market’s rebound is a bear market rally or whether we’ve put in the lows for this cycle.

“At this point the rebound is almost bang on the average bear market rally (in terms of rebound and length) in the S&P 500 since 1950,” says our head of equities Crispin Murray.

“The market breadth of the rally is not yet consistent with a change in trend.

“The rule of thumb is you need to see 90% of stocks above the 50-day moving average to signal a change in market direction. We are at 73%, though this could continue to climb.”

“The challenge to this perspective is the unusual speed and scale of the increases and the market’s current confidence that inflation will be brought back down.”

The bull case for equity markets is:

‘No pre-set path’: What the RBA statement means for investors

Did the RBA this week signal fewer rate hikes ahead? Probably not, says Pendal’s head of government bond strategies Tim Hext.

“We know we’re going to hit neutral this year. Another 1% can be expected, moving the cash rate to 2.85%.

“Whether it’s four lots of 25bp or 50bp at fewer meetings is only of interest to short-end traders. Hence the RBA’s line that it is ‘not on a pre-set path’.

“Sounds like an opportunity for everyone to interpret this with their own confirmation bias — which on Tuesday seemed to be fewer hikes, not more.

“I think that’s reading too much into it.

“As asset owners we must remember the ‘central bank put’ is now also a ‘central bank call’.

“If bonds, equities and credit spreads rally too much without a significant easing in inflation pressures, the RBA will lean against the easing of conditions.

“The rally of the past month suggests this is in danger of happening — so expect more hawkish speeches from officials, especially in the US.”

Fixed interest: why bonds look promising and how to take advantage

A re-assessment of fixed income securities and yields — and their defensive qualities — have recently made bonds attractive again, says Dale Pereira, who heads up client solutions at Pendal.

“Bond returns don’t predict the future — they reflect what’s happened,” says Dale.

“That’s where the opportunity lies: they may be showing negative returns now, but the future looks a lot brighter.”

Bonds typically lead equities in terms of market reaction, says Dale.

“From the end of 2021 and into the first half of 2022, bond yields moved in line with expectations of future rate rises — which in turn reflected inflation expectations.

“But markets often over-react when extrapolating good and bad news. And that’s probably the case now.

“The market has likely priced in too many rate rises. It’s priced in a good chance that central banks won’t be able to control inflation. (Though recently that pricing has started to dissipate, making yields less volatile.)

“This means the bond market is at a much better entry point for investors.”