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Tim Hext: No taper tantrum, just gravity
Ongoing supply constraints will likely see 2.5% inflation in Australia next year. That may mean the start of a modest rate hiking cycle in 2023, says Pendal’s Tim Hext
INVESTORS were hoping the things driving risk markets higher might go unnoticed by central banks.
But a stronger economy, higher earnings and emerging inflation pressures could only be ignored by central banks for so long.
Emergency measures would eventually have to expire — and it seems we are nearing the time.
In Australia the central bank seems reluctant to remove the punch bowl too soon, choosing instead to almost outsource timing to the US Fed.
Australia will not be first to move to completely remove Quantitative Easing or to eventually raise rates.
But markets are correct in thinking the day draws closer.
The Reserve Bank is sticking with 2024 — but is likely to hit its inflation target of 2.5% long before then.
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Pendal’s Income and Fixed Interest funds
We are growing in confidence that ongoing supply constraints in our economy will see us hit 2.5% inflation next year.
The RBA will want to see several prints, but 2023 should see the start of a modest hiking cycle.
The expiry of the Term Funding Facility will also have an impact in 2023 and 2024 — that alone pushes mortgage rates up 0.75%.
So the RBA should only need to raise cash to 1.25% by 2024 to see an overall real economy rate structure 2% higher.
At that point the punch bowl will be gone and the party will end.
Let’s hope people taking on large amounts of debt today can cope.
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.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
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.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at September 29, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
This article is for general information 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 in this article 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 in this article 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 contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While 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.
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