The Point

Steve Campbell: Expect rates to stay unchanged til 2024

Inflation is moving in the right direction and it’s likely we’ll see Christmas with rates still at 4.1% after the RBA again sat on its hands this week.

But any talk of rate cuts in the first half of next year should be discarded (barring a big, external shock), says Pendal’s head of cash strategies Steve Campbell.

“Inflation has peaked and the move lower will provide comfort for the RBA,” says Steve. “But services inflation remains uncomfortably high.

“It’s the level at which inflation gets sticky that’s key – and that’ll only become apparent in time.”

The RBA is not expecting inflation to return to its 2-3% target until mid-2025.

“That’s predicated on slowing economic growth, resulting in higher unemployment and easing wage inflation.”

Further policy tightening is likely only if those factors play out more slowly than the RBA expects, says Steve.

Got money in a global bond index fund? You should read this

Got money in a global bond index fund? Pendal’s head of multi-asset Michael Blayney has a note of caution for you.

Indexing bond investments appeals to many investors because it’s a low-cost way of incorporating diversified, defensive assets into a portfolio.

But global bond index funds have a hidden risk that may undermine their role in providing stability and defensiveness in portfolios.

That’s because global bond indicies tend to allocate higher weightings to the most indebted countries, which is a fundamental flaw, argues Michael.

“In bonds, it’s how indebted you are that determines your weight. Essentially, we are lending more to the people that owe the most money.”

Global bond benchmarks could be overweight to countries like China, Italy and emerging markets that might not pass a quality screen.

Oliver Ge: Fears of a ’70s inflation re-run are overblown

US inflation numbers were higher than expected in August, prompting more headlines about a second wave of inflation and further interest rate rises.

Can investors really expect a 1970s inflation re-run?

“There’s a lot of commentary on a possible ’70s-style, second wave of inflation,” says Oliver Ge, a portfolio manager with Pendal’s income and fixed interest team.

“But I don’t believe we’re going down that path. We’re not even close to a rerun of the 70s.”

Higher US inflation in August is just one uptick after 13 consecutive months of disinflation – and inflammatory news headlines are unwarranted, Oliver argues.

“The difference is that back then, the US was highly oil-dependent, and it also was experiencing a massive devaluation of its currency. Put the two together and it triggered a big wave of inflation.

“The US is no longer energy-dependent – in fact it is an exporter of oil. Unionisation is no longer widespread. There’s none of the original catalysts that prompted the blowout.”

Recession risk is still out there. Here’s why

The risk of recession appears to be side-lined for now, but investors may be overlooking one factor, argues Pendal’s Oliver Ge.

Much of discussion about higher interest rates has been focused on the impact of bigger mortgage repayments for homeowners.

But tighter credit conditions and stricter collateral requirements for business are likely to have a more significant impact, says Oliver, an assistant PM with our fixed interest team.

“Higher interest payments are a strain for businesses, but it’s when you lose access to credit that the stress comes through.”

There is evidence of tighter lending standards in the US which will likely flow through to defaults in six-to-nine months, he says.

“The prospect of recession has for the moment been sidelined, but the risk is still very much there.”