Tim Hext: a timeline for the slow unwind of extraordinary monetary policy
Here’s our weekly Bond, Income and Defensive Strategies wrap from Pendal portfolio manager Tim Hext (pictured).
THE RESERVE BANK last week started the slow unwind of extraordinary monetary policy.
In recognition of the overall stronger economy, Yield Curve Control will not extend beyond the current April 2024 bond.
When the current $100 billion of Quantitative Easing (QE) ends in September, the pace will fall from $5 billion a week to $4 billion a week. It will be reviewed again in November.
Together with the closing of new borrowing from the Term Funding Facility (in total $187 billion lent) this represents the first steps back toward conventional monetary policy.
In our view the timeline looks something like this:
QE will likely taper further once the US Fed starts its own taper later this year.
The end of QE is probably brought forward by recent AUD weakness, relieving RBA concerns that higher rates here would push the AUD above 80c.
Of course there are a number of clear criteria laid out by the RBA to actually hike cash rates.
Inflation must be sustainably within the 2-3% band. For that to happen they believe wages need to be at least 3%, which in turn requires full employment.
The view is full employment is nearer 4% than 5%. We wrote extensively about employment and wages in our last newsletter. (Contact a Pendal key account manager for a PDF copy).
Given our views on inflation and wages we expect rates to lift-off in the first half of 2023. We expect them to stop around 1.25% to 1.5% before staying there for some time.
Of course this is a view into the future. In a week dominated by lockdowns and US bond rallies, bond markets here saw lower yields.
There is a lot more to play out in US employment markets in the months ahead.
Unlike Australia where jobs are now higher than before Covid, the US still has 8.5 million jobs “missing”.
The bulls blame higher welfare payments discouraging people from returning to low-paying jobs. The bears suggest COVID has shown the way for businesses to permanently operate with fewer staff.
The truth is likely a bit of both.
How this plays out in the months ahead will set the tone for bonds markets and eventually equity markets.
We will dive deeper into this topic in the weeks ahead.
About Tim Hext
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.
Led by Vimal Gor, Pendal’s BIDS 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.
The team oversees $22 billion invested across income, composite, pure alpha, global and Australian government strategies with the goal of building Australia’s most defensive line of funds.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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