Tim Hext’s weekly bond market outlook
Here’s the bond market outlook from Pendal portfolio manager Tim Hext ahead of this week’s interest rate decision and US election. Reported by portfolio specialist Dale Pereira
It’s all about this week.
Quantitative Easing and Blue Waves. Two expressions seldom mentioned — let alone together in a sentence. But Tuesday and Wednesday all will be revealed.
The RBA has been talking about rate cuts and likely Quantitative Easing (QE) for several months. Now it’s delivery time.
Yield Curve control, cash rates to 0.1% and Exchange Settlement to 0.01% look likely. QE of $100 billion in bonds and semis out to 10 years also seem likely.
Soon after polls will open in the US. By lunchtime Wednesday in Australia results will be flooding in.
The presidential race is critical and the US Senate may be on a knife’s edge.
A Joe Biden victory will mean massive stimulus with a Democrat Senate but major blocking if the Republicans hold it.
A Donald Trump victory would likely pave the way for decent stimulus because both a Democrat and Republican Senate would likely support it.
With new waves of Covid in Europe and the US, there is little doubt that extra fiscal and potentially monetary stimulus is needed.
Markets are largely priced for it. Only a contested election or a hostile senate can block it because both presidential candidates will want to start a term with a massive boost.
The balance of probabilities should be risk friendly, with only contested outcomes a landmine in waiting.
By Wednesday evening we should know where investment markets are headed for the next few months.
As always markets will move fast and we have our plans in place to adjust positioning for the outcomes. We want to make sure we are proactive — not reactive — to the news, a mistake many made in 2016.
Even as the US election result eventually becomes yesterday’s news, whoever is in power will face the tough task of rebuilding the US economy.
There may be some very short-term wobbles, but bonds should still perform. The main data point in Australia last week was the September quarter CPI.
A childcare-led bounce-back from the June quarter meant a 1.6% headline number or 0.7% Yearly. Underlying was 0.4% or 1.2% yearly.
All in all inflation has held in well this year. Goods prices are going up while services flat line — the reversal of a near 30-year trend.
While Covid is partly behind this — and it’s too early to call a trend — we will be keeping a close eye on how this unfolds in the quarters ahead.
Massive fiscal stimulus and the re-emergence of demand and supply could see prices tick higher in 2021 — a welcome development for the RBA but not the current market view.
And did we mention the Melbourne Cup? Avilius at $40 is a good outsider but this does not constitute a trade recommendation.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.
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