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Tim Hext: Inflation looks to be softening. Are sunnier days ahead?

The super-high inflation battle of 2022 may be won, but the outcome of the war is still uncertain says Pendal’s head of government bond strategies TIM HEXT.

THE market had been looking for US inflation to moderate for several months.

Forward indicators of goods prices had pointed this way since Q3.

Last week the US Consumer Price Index finally delivered a much slower pace of increase than expected.

Stocks surged, which was surprising given it wasn’t entirely unexpected.

Then again, markets were looking for any relief from this year’s constant inflation woes to jump on a positive narrative.

Doers this start an ongoing trend? Or will this month’s CPI join earlier false dawns such as July?

As always with inflation the breakdown is important.

Headline was 0.4% against consensus 0.6%. Core was 0.3%, below the consensus of 0.5%.

Leading the way down was used car prices, which fell 2.4%. Leading indicators show further weakness ahead. After a Covid-led 68% rise there is plenty of room to fall.

Apparel prices fell 0.7%. Inventory overhangs in a number of retail areas may see further discounting ahead.

The surprise contributor to lower inflation was health insurance.

This had been increasing by 2% per month for the past year. It fell 4% in October — and the way it’s calculated means it will keep falling for the next year.

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Pendal’s Income and Fixed Interest funds

Finally, rents showed some slowing in the pace of rises. They were still up 0.6%, but it was the smallest increase in six months. Again, forward indicators point to continued moderation in rent (and owner equivalent rent) in the CPI.

These changes all point to further moderation in the months ahead.

Although not entirely unexpected, lower inflation will continue to provide some encouragement to markets that the Fed can slow the pace of hikes.

December still seems a lock for a hike of 50 percentage points. But in 2023 they could moderate to 25 points or even none.

What’s next

So the super-high inflation battle of 2022 may be won. But the outcome of the war is still uncertain.

Getting from 9% to 4% next year will be the easy part.

The globe is a now a different place post-pandemic.

A combination of commodity shocks from Russia and tight labour markets globally will likely see inflation get sticky around 4%. Any rate cuts by then may be wishful thinking.

Unless we tip into a steep recession the US Fed will remain wary about calling victory on inflation any time soon.

Investors should continue to view any decent rallies as an opportunity to de-risk portfolios for the challenges ahead.

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

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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 November 17, 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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