RBA

The yield curve target has been abandoned.

The key bit of the announcement is tabled below, from Lowe’s opening remarks.

By late last week, this had become the markets’ consensus position, however since as far back as mid October (a long time in rate markets!) the spread between the actual 2024 bond yield and the target had grown steadily larger.

With only a weak initial direct intervention into the bond market, and nothing thereafter, most signs suggested the RBA was set to terminate the policy, and just needed to wait for the calendar centric meeting to roll around, before making the announcement.

We’ve all been there before.

You can see the shift in market pricing pretty clearly below (Australia, LHS), with both short and longer dated yields rising, and note also that this isn’t just a local phenomenon, with the US (and many other markets) pricing in a material pull forward in the timing of rate hikes, as a function of improved growth expectations, and higher inflation expectations.

Note also the flattening of the curve (bear flattener), which suggests the market also thinks that central banks may be making a mistake, by tightening prematurely. We think this too is a risk. We are getting on for late cycle, and in the COVID-era, things move quickly.

Today’s announcement, however, is somewhat less decisive in its stance.

Yields fell, suggesting a somewhat more dovish than expected policy shift (note, it is all hawkish, but, less hawkish is dovish at the margin, in the realm of parsing expectations). You can see the policy announcement shift fairly clearly below (which annoyingly is not calibrated to eastern standard time (EST).

And the dollar fell, with the mix of the two being fairly definitive (consistent) in their economic interpretation.

The market isn’t sure what to think, rallying initially, and starting to give back those gains.

With long duration rate sensitive stocks fully giving back the gains.

In our view, a lot of ink spilled, for the same conclusion. Rates have cyclical upside pressure, and a repricing from pandemic lows.

Our direct equity portfolio is flat relative to benchmark, on a somewhat whippy day. Our main positioning (underweight resources, long energy, underweight duration (which means infrastructure stocks, REITs) and underweight secular growth stocks (which is quite a similar point to short duration, given the high degree of correlation between the AusBond composite, and the MSCI Growth basket) remains unchanged.

For us, the secular growth narrative sectors are predominantly tech, health, and parts of the consumer space (across both staples and discretionary), where valuations (such as those shown below, for RMD) are not uncommon.

You can also view some other good examples here.

At the multi-asset portfolio level, we remain underweight fixed income, and will happily reallocate back from cash as yields ratchet higher (towards levels that we think are appropriate).