THE RBA statement this week played a reasonably straight bat.
But it’s also reasonable in a highly uncertain and complex world that you maintain maximum flexibility.
Anyone with a strong opinion on the economy at the moment is likely displaying misplaced bravado.
What we do know is rates are going to hit neutral this year. Another 1% of hikes can be expected, moving the cash rate to 2.85%.
Whether it’s four lots of 25bp across four meetings or 50bp at fewer meetings is only of interest to short-end traders.
Hence the RBA’s line that “the Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path”.
Sounds like an opportunity for everyone to interpret this with their own confirmation bias — which on Tuesday seemed to be fewer hikes, not more.
I think that’s reading too much into it.
Find out about
Pendal’s Income and Fixed Interest funds
Much like the US Fed, the RBA will be keeping a close eye on overall monetary conditions.
As asset owners we must remember the “central bank put” is now also a “central bank call”.
That is, if bonds, equities and credit spreads rally too much without a significant easing in inflation pressures, they will lean against the easing of conditions.
The rally of the past month suggests this is in danger of happening — so expect more hawkish speeches from officials, especially in the US.
RBA officials will have time over summer to sit back and see the impact of hikes on the economy.
I suspect the hikes will not have a big impact yet — but will do so next year.
This is when 30% of total mortgages come off 2% fixed rates onto 5%-plus floating rates.
However, while goods price inflation will be falling, services inflation will be becoming more embedded in the economy, courtesy of labour shortages.
This will limit any further rallies in bonds.
They are not expensive, but recent rallies mean they are no longer cheap.
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.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at August 3, 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