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Anna Hong: Markets will remain choppy with upcoming CPI releases

IT’S almost a year to the day since NSW and Victoria exited lockdowns.

NSW premier Dominic Perrottet declared “freedom day” on October 11 last year as millions of Australians celebrated at pubs and restaurants in Sydney and Melbourne.

Today’s headlines couldn’t be further from that optimism. Recession. Inflation. Strikes. Oil prices. War.

A stream of bad news has led to near-historic lows in consumer confidence.

With central banks unusually coordinated in rapid-fire rate hikes, it’s reasonable to be concerned.

RBA deputy governor Michelle Bullock’s speech yesterday was a timely reminder of the central bank’s objectives: currency stability, full employment and the welfare of the people of Australia.

That differs from the US Federal Reserve’s dual mandate of price stability and maximum sustainable employment.

Welfare of the people. A small but important difference.

This objective influenced the RBA’s discussions, leading to an earlier slowdown in rate hikes this month.

Recessions bring a real human toll that can lead to a prolonged economic slowdown.

Research has shown that people out of work for extended periods become so disconnected from labour markets, that they struggle to find jobs even after the economy has recovered.

The effects of recession on labour force shrinkage is evident in Europe and the US. Participation rates in the US have barely budged despite some of the tightest labour market conditions on record.

In Australia the belt-tightening has started with consumer goods spending growth flat-lining in 2022.

In the RBA’s latest Financial Stability Review, the Reserve Bank stress-tested the impact of a 3.6% cash rate target. About 40% of people would experience a -20% to 0% reduction in cash flows, with almost 15% going into negative cash flows.

The psychological impact of watching savings buffers evaporate would likely increase the pace of decline in consumer spending as rates increased.

The peak rate could very well be lower than the market pricing of 3.6%.

Markets will remain choppy with upcoming CPI releases.

As consumers head into the first fully open Christmas in three years, many will travel to visit families they have not seen in years.

Anyone booking travel will be aware of the high prices of airfares, particularly across the Tasman.

These will feed into CPI – as possibly a last hurrah before belt-tightening in 2023.

Find out about

Pendal’s Income and Fixed Interest funds

About Anna Hong and Pendal’s Income and Fixed Interest team

Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at October 19, 2022. PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). 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

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