NEWS
23 May 2024 - The Rate Debate - Navigating Australia's Economic Crossroads
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The Rate Debate - Navigating Australia's Economic Crossroads JCB Jamieson Coote Bonds May 2024 Without the significant influx of people migrating to Australia over the last 18 months, the country has been in recession since the first quarter of 2023. In fact, when adjusted for population growth, this marks the longest running recession Australia has experienced since the early 1990s. There's mounting evidence that the Australian economy is losing momentum. Not only in economic indicators such as declining retail sales, dwindling consumer confidence, collapsing savings rates, and unemployment ticking higher, amongst other signs. Many readers will likely agree that the hardships facing many people in the community are becoming increasingly evident through personal stories and experiences. The Reserve Bank of Australia (RBA) has acknowledged this trend, stating that "household consumption growth has been particularly weak as high inflation and the earlier rises in interest rates have affected real disposable income. In response, households have been curbing discretionary spending." This raises the question: what would be the cost to the Australian economy if interest rates were to go up from here? There's no doubt that inflation remains high and has exceeded the RBA's target range. However, it's also true that inflation is easing in response to one of the fastest monetary policy tightenings in history. Given these factors, the RBA must carefully consider the potential economic fallout before deciding on additional rate increases. It's both sobering and indeed encouraging to see just how far we have come in the fight against inflation in a relatively short period of time. After reaching a peak of 7.8% in the December quarter of 2022, we've observed a consistent downward trend in the quarterly year-on-year Consumer Price Index (CPI) numbers: 7.0%, 6.0%, 5.4%, 4.1% and most recently, 3.6% in the January quarter. It's easy to forget, but the inflation figure for the final quarter of 2023 surprised on the downside, with a quarter-on-quarter increase of just 0.6% versus the expected 0.8%. It's as if some inflations hawks are pushing for a deep recession just to bring inflation down rapidly. They seem to think that rescuing an economy from a potential deep recession is easy and that slashing interest rates will solve all the problems. However, economic momentum is everything, and a steady return to target inflation, rather than forcing a deep and painful recession, is a much smarter approach to pursue price goals. Thankfully, Michelle Bullock acknowledged as much in her recent press conference. Amazingly, global markets currently predict that only two central banks - the Bank of Japan and the RBA - are expected to hike interest rates over the next two years. Meanwhile, other central banks in the developed world are projected to cut interest rates from here, with some like the European Central Bank, Bank of Canada and the Bank of England, planning fairly aggressive cuts over the coming 12 months. Even the US Federal Reserve (US Fed) is likely to cut rates by the end of the year. In my over 20 years in the bond and money markets, I've never seen such a wide dispersion of views and opinions on interest rates as we currently have in Australia. We are at a pivotal moment in monetary policy. Inflation hawks point out that the RBA cash rate is significantly lower than the US Fed's (4.35% versus 5.375%), but there's a clear reason for this discrepancy. Since the first round of rate hikes, Australian mortgage rates have increased by over 3%, compared to just 0.5% in the United States. This difference illustrates how much more potent the transmission of interest rate hikes is in Australia compared to other jurisdictions. The dominance of 30 year fixed rate mortgages in the US, contrasted with the predominantly floating rate mortgages in Australia, means it's much harder for monetary policy to slow the economy down in the US than it is in Australia - that is, monetary policy has a more immediate impact on the Australian economy. It's evident that the 425 basis points of rate hikes since 2022 are working, and the lags of monetary policy are hitting the economy just enough to slow it down. Given this, raising rates to 5.0% would be seriously detrimental to the Australian economy. It's essential to consider this context when debating the appropriate level for interest rates in the current environment. Whilst first quarter inflation numbers came in above market expectations due to factors that rate hikes can't easily control, the wild predictions of several more rate hikes from here are unfounded. I believe the RBA's next move will be a rate cut later this year as the economy continues to slow down and react to the squeeze of higher rates. The RBA has indicated that the current level of interest rates is sufficient to bring inflation back within target by the end of next year. Meanwhile, in the US, the mortgage market is unlikely to be a source of any turbulence from higher rates. The real risks lie in the corporate credit markets, where tenors of borrowings are much shorter and significant expiries are set to occur from 2025 and onwards. Consider this: $2.5 trillion dollars of corporate bonds expire in 2025, and another $2.8 trillion in 2026, all rolling off very low interest rates. With the US Fed likely projected to cut rates only one or two times this year from six that were priced in at the end of 2023, many chief financial officers will be anxious about whether investors will lend to lower-rated corporates when a 10-year US Treasury bond offers 4.50%. Different countries face different challenges, and it's crucial to understand these nuances when considering monetary policy and its broader effects. Given these complexities, Australians face a unique economic landscape. The current context requires careful consideration of monetary policy's role in stabilising the economy without triggering a deeper downturn. Understanding these dynamics is key to navigating the uncertainty ahead. Funds operated by this manager: CC Jamieson Coote Bonds Active Bond Fund (Class A), CC Jamieson Coote Bonds Dynamic Alpha Fund, CC Jamieson Coote Bonds Global Bond Fund (Class A - Hedged) |
22 May 2024 - Performance Report: Delft Partners Global High Conviction Strategy
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22 May 2024 - Looking beyond the noise at this year's Budget
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Looking beyond the noise at this year's Budget Pendal May 2024 |
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WHEN you've watched enough federal Budgets (this was my 35th in markets), you start to see familiar patterns across commentaries. Every vested interest or ideological bent comes out bleating about the Budget being irresponsible or reckless, that there's too much spending or not enough major reform. What worries me more is when people view the government as no more than a large corporation and when they speak of the budget like a profit and loss statement. Looking through the noise and self-interest is what really matters for bond markets in the year ahead. I have narrowed it down to three impacts. InflationThere are a number of direct measures that reduce inflation, one of which is electricity subsidies. Every household gets $300 off their electricity bill, by way of quarterly $75 payments directly off the bill. Businesses receive $325. The average household bill is $2,000 a year, so that's 15% off. Electricity is 2.4% of the CPI basket, so this equates to 0.36% off inflation in direct impact. The government is quoting 0.5% overall impact.
Queensland has already announced a $1,000 subsidy while Western Australia has announced a $400 subsidy, again not means tested. It will be interesting to see what upcoming state budgets keep rolling existing subsidies (no impact to inflation), let them roll off (inflationary) or, like Queensland, increase them (deflationary). If we assume modest subsidies coming up from other states, then the electricity impact on lower CPI could be 0.8% or even higher. Other measures in rental assistance and cheaper medicines are slightly deflationary. Overall, federal Treasury is forecasting inflation of 2.75% in 2024/25, which is below the current Reserve Bank (RBA) forecast of 3.2%. We expect an upcoming downward revision of the RBA forecast of 3.8% CPI for 2024, which looked too high anyway. This could also see its 2024/25 forecast moderated lower, though still near 3%. Tax cuts and spendingAgainst the direct impact of the Budget on lower inflation, markets ask the question of whether the extra money in people's pockets may cause higher inflation if and when it is spent. There is around $20 billion of new spending measures (the Stage 3 tax cuts have been locked in since 2019) in this Budget, with the majority in the next two years. The Budget will return to deficit, with a forecast of $28.3 billion for 2024/25 and $42.8 billion in 2025/26. While still low by international standards, the main question is whether or not deficits are appropriate at this point of the cycle. For example, an iron ore price of US$60 is assumed, despite a current price nearer US$110 and a five-year average of US$120. This opens up potential upside surprises as we have seen in the past few years. This has really excited Budget hawks and has some calling for higher rates as all this money is supposedly spent, stoking inflation. The question I would ask is whether or not this money is being injected into an economy at full capacity. On this, my view is that we are sufficiently past the pandemic that supply chains can handle the modest rise in consumer spending without stoking inflation. Consumers will be spending more in the year ahead. Tax cuts, subsidies and lower inflation should finally see some growth in real incomes - however, this is from a base of real incomes having for the past few years.
Bond issuanceWe will see an update on the 2024/25 program from the AOFM shortly. Given high refinancing (two benchmark maturities totalling $83 billion) the borrowing task is expected to be around $90 billion, as the RBA has borrowed much more than needed this year. It is important to remember that when determining yields, bond demand and supply dynamics are largely outweighed by economics. As a bond manager, I only view supply and demand as a short-term impact around supply events. Ignore the booming debt rhetoric from some commentators and self-styled bond vigilantes - Australian debt will remain AAA for at least the medium term, and with the RBA moving to an "ample liquidity" framework, demand for bonds will remain robust. So, what does this mean for bonds?Well, the market always votes straight away, and has already made a half-hearted attempt to run with the higher spending higher inflation narrative. However, as the dust settles (to quote the cliché), yields are "sharply unchanged". I think the RBA will see the Budget for what it is - a mixed bag of measures that will leave it hopeful of further inflation relief but wary of whether the 2%-3% band can be achieved and then sustained. I would also make the observation that the "Future Made in Australia" spending is an overdue response to the global game-changing US Inflation Reduction Act. By comparison, our government's measures are modest for now, but can be expected to increase in the future. We are in a very different world to the last decade and governments must respond. For now, a more detailed breakdown of the domestic economy is below.
Author: Tim Hext, Pendal portfolio manager and head of government bond strategies |
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Funds operated by this manager: Pendal Focus Australian Share Fund, Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Regnan Global Equity Impact Solutions Fund - Class R, Regnan Credit Impact Trust Fund |
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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com |
21 May 2024 - Performance Report: PURE Income & Growth Fund
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21 May 2024 - Performance Report: Bennelong Emerging Companies Fund
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21 May 2024 - Glenmore Asset Management - Market Commentary
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Market Commentary - April Glenmore Asset Management May 2024 Equity markets were generally weaker in April. In the US, the S&P 500 fell -4.2%, whilst the Nasdaq was down -4.4%. In the UK, the FTSE rose +2.4%. On the ASX, the All-Ordinaries Accumulation Index fell -2.7%. Gold was the top performing sector for the second month in a row, whilst real estate was the worst performer, which offset its strong performance in March. The main driver of equity markets in the month was a change in thinking by investors around global monetary policy, which shifted from the next move being a rate cut, to in fact potentially another rate increase. This was due to inflation data released in the US on the 10th of April that showed higher than expected inflation. Consumer Price Index (CPI) data for March 2024 rose +0.4%, which was slightly higher than market expectations of +0.3%. Bond markets reacted to this news with higher yields. The US 10-year bond rate rose +42 basis points to 4.63%, whilst its Australian counterpart increased +46bp to 4.42%. The Australian dollar was flat, finishing the month at US$0.647. Funds operated by this manager: |
20 May 2024 - Performance Report: Argonaut Natural Resources Fund
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20 May 2024 - Investment Perspectives: 14 of the most important charts for data centre investors right now
17 May 2024 - Hedge Clippings | 17 May 2024
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Hedge Clippings | 17 May 2024 The next federal election is not due for another year, but the budget handed down on Tuesday had all the hallmarks of a government preparing for the polls without actually setting the date. Jim Chalmers won't admit it, but based on this comment from Chris Richardson during the week: "If the enemy is inflation, the IMF says you should cut spending and raise taxes. Instead, we're getting a very big tax cut and almost matching that with large increases in spending," then we're heading for trouble. If Richardson is correct, and we're certainly not going to doubt him, then Chalmers is at odds with the IMF, as well as one of Australia's top economists. Meanwhile, Treasury (presumably the advice he's relying on) is at odds with the RBA's estimate of inflation as pointed out in this piece: "Treasury has inflation heading in one direction - down - while the Reserve Bank says the opposite. They can't both be right, and what happens will play an outsized role in deciding when, or if, the central bank cuts interest rates. The government claims the budget has been designed to take three-quarters of a percentage point off inflation this year and another half a percentage point next year, while unemployment will rise slightly to 4.5 per cent next year. Time will tell if Treasury or the central bank - which has forecast inflation to be 3.8 per cent in December this year - is correct. Without a rate cut, there is close to zero chance of an early election." So Jim's budget is increasing spending via handouts across the year, topped up by Stage 3 tax cuts due in July, and wage increases already announced or in the pipeline, hoping inflation will reduce to 2.75% mid next year (around the scheduled election time) while the RBA's own forecast is for it to still be 3.2%. Given the RBA's stated driver of interest rates is taming inflation, there's a chance of a rate cut - or possibly more than one - by this time next year, but only if their forecasts are correct, and it's a big IF based on the stickiness of inflation to date. In the government's favour, this week's employment figures (along with some positive signs from the US) showed unemployment creeping up to 4.1% on a seasonally adjusted basis. The RBA's other role of maintaining full employment is secondary to inflation, but it is noteworthy that the number of unemployed people has risen 13.7% from one year ago, and Michele Bullock is on record as saying an unemployment rate of 4.5% or above would be required to have a significant effect on reducing inflation. You can't blame the Treasurer for pitching the budget and blowing the "surplus" trumpet towards the next election - whether in December or in the first half of next year, but he is ignoring the longer term deficits. He'll worry about those in due course, or leave them to his successor. News & Insights Magellan Global Quarterly Update | Magellan Asset Management April 2024 Performance News Bennelong Long Short Equity Fund |
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17 May 2024 - Performance Report: Bennelong Concentrated Australian Equities Fund
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