RBA statement

Gone are the key words such as “patient”, or “modest”, and the stance is a switch from being “highly supportive“, akin to a desire to help, to “highly accommodative“, meaning, in our view “too easy for current conditions”.

Here’s the old text.


And the new text.


No real surprises.

As usual, we can deconstruct the co-movement of macro market variables to work out what kind of shock, if any, this might be, post the announcement.

Dollar up.

Yields up.

Risky assets fractionally lower.

Rate-sensitives more markedly lower.

All in all, hawkish, at the margin.

As we’d written last month in our flagship investment strategy deck, all central banks (with the possible exception of the BoJ) are in a synchronous tightening cycle, responding to the common factors of above trend growth, tight labour markets, and rising inflation.

Now, they haven’t raised yet, but they will, the language is more hawkish, and brings May into play. Each update pulls forward the timing.

What does this mean, to us, from a portfolio perspective?

Higher rates, higher mortgage rates, therefore some NIM support for banks, which have been pressured over the years by the low rate backdrop (deposit rates don’t asymptote to zero, but the lending rates declined, causing spread compression).

Housing demand is unlikely to collapse immediately, even with a sizeable amount of adjustable rate / variable rate mortgages resetting higher, and it is the same with household debt servicing capacity, so the short run outlook for bank profitability is likely robust.

Medium to longer run, however, BDDs are likely to rise, credit demand will surely decline (from presently very elevated levels) and household balance sheets are already very, very stretched, which in our mind (a very non consensus opinion) does raise solvency risks, and hence the outlook for the banks is quite mixed. There’s a trade to be made, but not an easy or straightforward one.

Higher rates do help the insurance companies, with higher returns to float, and don’t come with the BDD overhang. As such, we prefer the insurance companies, but still have a sizeable enough allocation to banks.

We are quite sure the consumer discretionary space is challenged, however. Higher oil, higher inflation, higher mortgage repayments, all take away from the share of wallet available to discretionary expenditure.

Given high valuations in the sector, we think the outlook is especially negative.

More generally, REITs, utilities, infrastructure, gold and high duration secular growth stocks tend to suffer in a higher rate environment, as such we are maintaining underweights to those sectors.

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