Markets wrong on Australia rates outlook – pension giant

Pace won't be so fast…

Markets wrong on Australia rates outlook – pension giant

by Matthew Burgess

Australia’s central bank will soon begin hiking rates for the first time in a decade, but the pace won’t be as fast as markets expect.

That’s the view of David Goodman, a senior economist at Aware Super Pty, who says policy makers will be “more cautious” with their pace of tightening than the steep path to more than 3% that’s priced into swaps markets over the next two years. Aussie households will need time to adjust their spending to higher rates, which likely means a more moderate lift-off than what the US Federal Reserve is signalling. 

“We expect the RBA to be hiking this year, but certainly much less aggressively than market pricing,” said Goodman, who helps oversee investment strategy at the A$155 billion ($116 billion) pension fund. “Markets are kind of just falling for that trick: RBA follows the Fed mechanically.” 

Goodman is sanguine about the economic outlook for Australia, as mortgage stress is low and budgets are “well buffered.” While consumer cost pressures may remain elevated for another quarter or two, Aware is “struggling to see” inflation materially accelerating without sustained wages growth. The economic backdrop in Australia is different to the US, he said, noting that the RBA was cutting rates during the Fed’s last hiking cycle.

The Fed raised interest rates for the first time since 2018 this month, and is expected to deliver at least a quarter-point hike each meeting this year. The RBA signalled last week the benchmark rate will remain at a record low 0.1% until unemployment is low enough to spark faster wages growth. 

Goodman is also unconvinced by the darker prognosis for the US economy reflected in the recent inversions of parts of the Treasury yield curve.

The curve “is a very reliable indicator but with a reasonable lead time” before a recession of as much as 36 months, said Goodman. “If we really did believe it today, that doesn’t tell you you’re going to wake up in April and suddenly be in a recession.”

The US 10-year yield briefly dropped below its two-year equivalent on Tuesday for the first time since 2019, crossing at a level of about 2.39%. The inversion is the latest in a series beginning in October.  

Goodman is also positive on the Australian dollar, the best performing G10 currency this year. He says the Aussie has room to “grind higher” into the high 70 US cent range over the next couple of months, supported by high commodity prices, as the greenback has little impetus to strengthen.

“On any fair value model, the Aussie dollar does look undervalued versus commodity proxies,” Goodman said.

 --With assistance from Garfield Reynolds.


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