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Tim Hext: Australian business remains resilient as we enter spring

Businesses believe the economy remains on a decent footing, which indicates a soft landing looks on track for now, writes Pendal’s head of bond strategies TIM HEXT

SPRING will well and truly arrive on Australia’s east coast this Saturday.

The forecast here in Sydney is for 31c.

Weather apps are now so accurate that not only am I confident it will be 31c – I also know it will happen at 2pm.

Here in Pendal’s Income & Fixed Interest team we’re always looking for ways to improve our forecasting ability.

We constantly test economic and market indicators that have a track record of predicting bond and credit markets.

We test hundreds of indicators before narrowing them down to a small number help create quantitative models to assist our portfolio positioning.

Even better if the indicators are not widely tracked. Inflation and unemployment numbers are obsessed over but we need to get ahead of those.

While the level of an indicator is important, we’re usually more interested in the direction of travel.

NAB’s Monthly Business Survey is the richest domestic economic information source.

NAB surveys almost 600 firms on a monthly basis, creating numerous indicators of changes in the economy.

Our testing consistently shows many of the outputs have a strong performance in predicting future market moves — so we pay close attention from a qualitative and quantitative perspective.

What does this month’s survey show? Business managers believe the economy remains on a decent footing and has even slightly picked up from July.

The soft landing looks on track, at least for now.

Courtesy of NAB here are the results:

Source: NAB Monthly Business Survey: August 2023
What the data means

The data in the first section is on a net-balance basis. In other words, firms expecting a deterioration are subtracted from those expecting an improvement.

For conditions and confidence, the average has been around six for several decades.

Therefore, businesses are not confident about the future, but still see current conditions as favourable and even improving.

Mining, transport and utilities lead the way. Retail is weaker but holding up, though confidence is very low.

In summary, rate hikes should matter more (and might in the future) – but for now we are holding up well.

Labour costs remain elevated but showed some relief after July’s surge.

Final product and retail prices also eased, though levels remain elevated and consistent with inflation closer to 5% than 2.5%.

Finally, capacity utilisation still shows tight capacity. On average capacity is at around 81%. A reading of 85.1% is near the highs of mid 2022 and is not showing the freeing up of capacity we would have expected.

Overall, when thinking about where the economy is right now, it’s important to separate the nominal economy from the real economy.

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Pendal’s Income and Fixed Interest funds

In the nominal economy, population growth of almost 450,000 in the past 12 months has seen some expansion in the economy and increasing demand for goods and services provided by business.

Business, concerned about the future, have been reluctant to add to capacity.

However, on the real side inflation and higher rates has meant on an individual basis we are tightening our belts.

Our money quite simply is not going as far as it was, so individually we are buying fewer goods and services.

Business knows this, and when the population growth falls back to around 250,000 next year the nominal economy will also start feeling this.

For now though our models show rate hikes are still more likely than cuts, though the RBA looks happy to sit out the next few months.

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 Group

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.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at September 12, 2023. 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.

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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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