Macroeconomist shares her forecasts
The Reserve Bank of Australia (RBA) will maintain current interest rates before initiating an easing cycle in August 2024, one experienced macroeconomist and asset strategist has predicted.
Emma Lawson (pictured) of global asset manager Janus Henderson Investors, has provided insights into the Australian economy’s outlook and the RBA’s anticipated monetary policy actions.
According to Lawson, the anticipated cycle could see a reduction of around 175 basis points over 12 months, which is considered more modest than historical averages. She also noted the possibility of the RBA moving earlier and more aggressively than initially expected, with potential cuts totalling 250 basis points to drop below neutral interest rates.
The RBA’s recent monetary policy statement, which introduced a new format, slightly downgraded GDP forecasts and CPI expectations, highlighting a high degree of uncertainty. This uncertainty is supported by data showing volatility, with unemployment rate rising to 4.1%, wage growth at 4.2% year-on-year, and retail sales increasing by a less than anticipated 1.1% month-on-month.
“We see the very near-term RBA pricing as relatively in-line with expectations,” Lawson said, providing her Australian economic analysis and market outlook. “However, the expectation of policy rates held above neutral over a period of years continues to underestimate the cyclical risks.
“We currently consider the Australian yield curve as under-valued at points in the curve. We hold a long duration position and look to add to it on any worsening of the economic outlook.”
Recent market dynamics have led to a shift in expectations regarding the timing of the US Federal Reserve’s first interest rate cut, amid a growing consensus for a soft economic landing. This adjustment in anticipation has resulted in most yields hovering within their recent trading ranges. In this context, the Australian bond market experienced a slight downturn, with the Bloomberg AusBond Composite 0+ Yr Index falling by 0.30%.
The RBA opted to maintain its policy rate at 4.35% in February, aligning with market expectations. Global trends continue to significantly influence domestic financial conditions, fuelling ongoing debates regarding the potential strength of the economic cycle and the likelihood of policy easing. Yields on Australian three-year government bonds concluded the month 13 basis points (bps) higher at 3.70%. Similarly, yields on 10-year government bonds saw an increase of 12bps, finishing at 4.14%.
In comparison to the current cash target rate of 4.35%, the yield on three-month bank bills witnessed a minor decrease, ending 1bp lower at 4.34%.
Meanwhile, yields on six-month bank bills moved in the opposite direction, ending the month 5bps higher at 4.48% – movements that underscore the ongoing adjustments within the Australian financial markets, reflecting both domestic policy decisions and broader global economic influences.
In light of the complex macroeconomic landscape, Janus Henderson Investors’ credit strategy favours high-quality, investment-grade issuers demonstrating resilient business models, solid earnings, and conservative balance sheets.
“We have been actively and selectively taking advantage of the attractive yields on offer in highly rated corporate bonds and structured credit, particularly in the primary markets where transactions have come with new issue concessions,” Lawson said.
“While we believe that the cumulative impacts of restrictive financial conditions will become evident, we are mindful of a healthy starting point of above full employment and sound corporate fundamentals. As such, we remain open-minded to a wider range of potential economic outcomes including those involving a soft landing.”
Supported by thorough research and experience, the firm continues to identify investment opportunities where perceived risks may have excessively influenced valuations.
“In such instances, a strong case can be made for capital gains over-and-above already attractive cash yields, setting up for attractive risk-adjusted returns for patient investors with a medium-term investment horizon,” Lawson said.
“We continue to judiciously seek out, create and access such opportunities, while simultaneously preserving significant capacity to take advantage of opportunities arising through future market dislocations.”
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