The Point

Tim Hext: January inflation – a low point, for now

On-demand webinar: How to conquer the interest rate peak

A cut in the official cash rate by the Reserve Bank is likely around September this year, according to Commonwealth Bank’s Stephen Halmarick and Pendal’s Tim Hext.

Halmarick and Hext sat down together in a new on-demand webinar to discuss the implications of the February RBA rates decision.

Inflation is set to continue falling as the economy slows, thanks to a weak household sector, while the unemployment rate will rise, Stephen believes.

With a soft landing the most likely outcome, the current bond rally should be sustained, Pendal’s Tim Hext argues.

“Bonds still represent some value though they’re not as cheap as a year ago,” Tim says.

“You should have more duration than normal in bonds. You should be comfortable about owning credit, and it’s not a bad environment for equities.”

Click through to watch – CPD points apply.

Goldilocks beware: US inflation data puts markets on notice

This week US inflation surprised to the upside.

It was only a small miss, notes Pendal’s head of government bond strategies, Tim Hext.

“But it came against the narrative of falling inflation. Fed cuts are being pushed out and bond yields are drifting higher.”

For now, the markets will grant inflation a bit of leeway, says Tim. “Long-term inflation expectations only moved a little higher.

“But if this becomes a trend in the months ahead risk markets will start to take notice, since rates will stay higher for longer and the chance of a recession will increase.

“Goldilocks beware.”

Pendal’s view is that the overall trend to lower inflation is still intact, says Tim.

“But after last year’s sugar hit from lower oil prices and improved supply chains we’re entering a period of more balanced risk.

“I expect the fallout from this week’s numbers to persist very near term, as momentum funds lean against a vulnerable market.

“This will open up opportunities to once again build exposure into long-duration positions.”

Income and fixed interest wrap: latest outlook for inflation, rates and bonds

The Reserve Bank has revised its end-of-year inflation forecast to 4.5% – where it was in May. Are they right?

Pendal’s income and fixed interest team expects Q4 inflation between 0.7% and 0.8%, meaning the annual figure would be closer to 4.2%.

“If we’re right, then the November rate hike wasn’t needed,” says head of bond strategies Tim Hext.

“More importantly, this makes the chance of a February hike very low.

“Beyond February, inflation should remain sticky around 0.8% to 0.9% a quarter, meaning rate cuts are off the table for most of 2024.”

Pendal roughly agrees with the RBA’s expectation of a 3.6% number by mid-2024.

“By the middle of next year, US rate cuts may well be on the table, helping bonds find more support.”

In Australia, all eyes will be on Santa’s stocking to see the impact of the pre-Christmas hike.

Bond yields remain attractive on a medium-term basis, says Tim.

Moderating inflation is the trend of the year. Here’s what it means for investors 

Moderating inflation is now the trend of the year, says Anna Hong, an assistant PM with Pendal’s income and fixed interest team.

The US CPI increased 3.2% in the year to October – down from 3.7% annualised in September.

While Australia remains higher (we’re probably six months behind the US says Anna), we can see light at the end of the tunnel.

“Across the globe, economies have been seeing inflation come down as the resumption of supply chains eased price pressure on goods.

“This time around the inflation slowdown was much more broad-based, rather than just a goods-fuelled moderation.”

With moderating inflation as the trend of the year, investors can be more assured in their bond allocation, Anna argues.

“On balance, we believe Australian bonds should provide better risk-reward ahead.”

Pendal’s weekly fixed interest wrap

Another week, another rise in yields; Australia the worst developed market

AT THE time of writing, Australian 10-year bond rates were up another 0.24% for the week – despite little hard data to explain it.

True, the Reserve Bank is expected to hike rates next week. But long bonds have underperformed short rates, which is not what you’d expect.

Interestingly, Australia was by far the worst performer among global markets. Europe was largely unchanged and the US was only 0.05% higher.

So we’re left with various possible explanations — though if truth be told, the scale of the selloff is a surprise to all.