Janus Henderson macroeconomist weighs in
The Reserve Bank of Australia (RBA) will hold interest rates steady before starting an easing cycle in late 2024, a macroeconomist and asset strategist has predicted.
According to Emma Lawson (pictured) of global asset manager Janus Henderson Investors, the easing is expected to be more modest than the historical average, around 175 basis points, and spread over an extended period.
However, Lawson acknowledged that several risks could impact this base case scenario.
“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 in her latest economic analysis and market outlook. “Both are possible given the current set of uncertainties.
“We see the near-term pricing of minimal easing through 2026, 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.”
In May, the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose by 0.39%, reflecting mixed fortunes influenced by inflation and central bank expectations.
Lawson noted that bond markets rallied in early May but gave up most gains by month’s end due to shifting expectations around central bank easing cycles and inflation outcomes. Australian three-year government bond yields ended the month one basis point higher at 4.05%, while 10-year yields were one basis point lower at 4.41%. Three-month bank bills ended six basis points lower at 4.35%, and six-month bank bill yields fell 10 basis points to 4.60%.
The mixed performance in yields, Lawson pointed out, highlights the uncertainty surrounding central bank policies for the rest of the year. While the RBA held interest rates steady in May, it remained cautious about inflation risks.
“Local economic growth indicators continue to soften but with inflation remaining persistent, the immediate environment is one of waiting and seeing,” the economist said. “Consumer sentiment is very weak and raises questions about the ability for households to comprehensively rebound in H2. Meanwhile, current household spending remains moribund. The unemployment rate ticked higher, and the construction sector was weaker than expected.
“On the positive side, current capital expenditure is solid, and there is a lift in housing finance. The Federal Budget does point to some fiscal easing later in the year, which may be supportive.
“Overall, the RBA continues to note the difficult balancing act the current economic conditions provide. The bar appears high for further hikes, but they are able to delay easing until late in the year or beyond.”
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