The nature of inflation is changing slightly. Things like airfares have gone up a lot and rents. Used car prices also, which should have been coming off, had another surge.
But even though it’s a very high number – US consumer prices rose 1% for the month, which obviously is incredibly high – the May US inflation data was quite concentrated and quite a lot of other items did behave themselves.
But the market isn’t listening to that. They’re listening to the central theme and the central theme is that central banks are behind the curve.
The theme now is ‘we need to be back at neutral almost tomorrow’.
Neutral is between 2.5% and 3%. The US will get there in a few months. If market pricing is to believe, Australia also will be there well before the end of the year.
But it’s very clear that, even if they get to neutral quite quickly, inflation won’t necessarily be coming down at the same time. There’ll be a long lag.
Are they prepared to sit out that long lag and be patient, or are they actually going to take rates into contractionary territory?
That’s what equity markets and bond markets are now concerned about. They’re concerned that they’ll actually have to tighten into contractionary territory.
When that happens, the chances of a recession become a lot, lot higher.
Which asset classes look promising now? Tim explains in the above podcast
Listen to the full podcast above
Find out about
Pendal’s Income and Fixed Interest funds
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.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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