Economic and Market Commentary

June 2024 Update from the Australia Trade Floor

Portfolio manager Adam Bowe explains why now might be the perfect time to increase your bond allocation.

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Text on screen: Haydn Scott, Account Manager

Scott: Hi and welcome to this month’s trade floor update. Adam, policy rates on hold again, 4.35%. Governor Bullock suggesting that she is concerned about potential upside risks. No reprieve for mortgage holders as yet. What do we make of it all?

Text on screen: Adam Bowe, Portfolio Manager

Bowe: Well, Haydn, we haven't really changed our view substantially recently. Our view is that a policy rate of 4.35% is materially tight. You can see this in the percentage of household income that's having to be set aside to pay mortgages. So we think it's materially tight.

And you can see it's slowing growth. We had a first quarter GDP print recently and real GDP through the first quarter grew by just 0.1%. It's not quite a recession, but it's as close as you can come to a contraction.

So growth is really sluggish. The labour market is gradually loosening and wages are coming down – at least wage growth is slowing. And all that should over time pull inflation down.

We've come from high single digits now to three point something. Now we have a really important second quarter inflation print coming up and that's going to determine whether the RBA are convinced they've done enough. And they want to see that inflation will keep coming from three and a bit to two and a bit next year. We're convinced they have done enough and they can start an easing cycle around the end of the year.

Scott: We’re having an increasing number of client conversations around trying to time the introduction into the bond market. What do you make of this strategy? They're effectively waiting for rate cuts. What do you think about that?

Bowe: I would say to them, and it's a common theme, I would say to them, if you're waiting for the global easing cycle to start, it has started. The big news recently, is that two of the big central banks, Canada and Europe, started easing policy.

Earlier in the year we've already had Switzerland and Sweden ease policy. So four developed market central banks have already started cutting rates. When we look around the world, we think there are other countries like Australia, like New Zealand, like the U.K., who will be starting to cut rates by the end of the year.

So I think the big news more recently is that if you are in that camp that you're waiting for the easing cycle to start, the good news from recent events is that it's started.

Scott: And so bringing it all together, what does that really mean for our investors?

Bowe: I think the big theme really is, if you don't own as much duration or interest rate risk as materially more than you did two years ago, you should. And so that's certainly the way we're positioning our portfolio.

So there's some core countries, as I mentioned, Australia, New Zealand and the U.K. that haven't started easing rates yet. Interest rates are still elevated, but we're expecting them to start easing policy by the end of the year. And they’re the type of markets that we like owning duration.

So you should be owning materially more interest rate risk than you did, say two years ago. And if you're waiting for the central bank convoy to start easing rates, recent events suggest it’s started. Now’s your chance.

Scott: Great. Thank you. Well, there you have it. Trying to time markets means missing out on some potential upside and we'd really encourage investors to really take advantage of this high yield environment and start thinking about shifting some of their dry powder into the bond market.

For any further information, please visit our website or get in touch with your account manager. Thank you.

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