The retail sales data looked good for the month, but, whilst interesting, all the action today is on the RBA’s decision to not defend the yield curve target.
You would think, delicately put, that if you were a business owner, you would feel nothing short of betrayed. Somewhat harder to feel the same way about housing, but the point does and should extend.
We’ve been of the view that rates would rise, due to cyclical upside pressures. The challenge to central banks, globally, who wanted to use FAIT (flexible average inflation targeting) or yield curve control (ycc) was to push back, if necessary, against such a view though unlimited, direct interventions, buying as much as was required through newly created money.
The commitment needed to be a) credible and b) acted upon because the whole thing was a promise to households and businesses that they could and should go and take on debt (buy a home, a car, build a factory) in the certain knowledge that borrowing costs would be pegged lower for the next 3 years, at the least.
Both in the US and in Australia, this appears to have been abandoned, in which case we would expect rates to continue grinding higher. Take a look at the Aus 2 & 10 year rates data, shown below.
Our portfolios are well positioned for this, with a mix of stocks and sectors (in our direct equity portfolios) and macro and factor style exposures (across our multi-asset portfolios) that benefit from modestly higher rates.
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