High interest rates expected to increasingly affect various economic sectors
The Australian economy is experiencing a gradual slowdown, and while a recession is not anticipated, the sustained higher interest rates are expected to increasingly impact various sectors, a macroeconomist and asset strategist has said.
Emma Lawson (pictured), of global asset manager Janus Henderson Investors, offered a comprehensive analysis of Australia’s economic landscape, predicting a weakening labour market and a gradual return of inflation to target levels.
She anticipates that the Reserve Bank of Australia (RBA) will maintain current interest rates, with plans to initiate an easing cycle towards late 2024. This cycle is expected to be modest, totalling approximately 175 basis points spread over an extended period.
“There are a myriad of risks to the base case at this stage, with the high case of no easing until 2025, and a slow cycle through to 2026, and the low case of a modestly earlier commencement, which finishes with slightly more easing over the whole cycle,” Lawson said, providing her latest economic analysis and market outlook. “Both are possible given the current set of uncertainties.
“We see the near-term pricing hinting at a rate hike this year, and very limited cuts in 2025, as underestimating the risks to the economy after a long period of policy tightness. We currently consider the Australian yield curve as undervalued at points in the curve. We hold a long duration position and look to add to it on any worsening of the economic outlook.”
Meanwhile, in response to a complex macroeconomic and geopolitical environment, Janus Henderson’s credit strategy continues to favour high-quality, investment-grade issuers. The firm remains proactive in capitalising on attractive yields offered in the primary markets, particularly through high-rated corporate bonds and structured credit.
The Australian bond market faced challenges, with the Bloomberg AusBond Composite 0+ Yr Index reporting a 2% decline. Influenced by persistent inflation concerns both locally and in the US, Australian bond yields rose significantly by the end of the month. The three-year government bond yields increased by 42 basis points to 4.04%, while ten-year yields escalated by 46 basis points to 4.42%.
US economic data has been unexpectedly strong, influencing global inflation expectations and interest rate trajectories. Janus Henderson Investors said this divergence in economic indicators has contributed to higher yield levels, reflecting heightened market volatility and impacting investor sentiment.
In the domestic credit scene, Janus Henderson noted that Australian primary market activities remained robust despite global challenges. Notable transactions included Vicinity Centres issuing $500 million in 10-year bonds and significant issuances by Sydney Airport and Adelaide Airport.
Moreover, a ratings upgrade for the subordinated debt of Australia’s major banks by Standard & Poor’s highlighted a positive shift in credit quality perceptions.
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