Aus macro/RBA

The RBA remains on hold, as expected, and continues to signal (we think) to governments that they will take the stance of budget outcomes (which over the past month have all been quite inflationary) into account.

There is an acknowledgement of progress, and even of some near term (possibly building) economic weakness, but overall, inflation is the priority.

At the start of the month, the cash rate futures pricing looked like this…

…and is now (today) slightly lower at the 12m horizon, even as today’s wording was slightly hawkish.

Market movements are consistent with this hawkish interpretation, with the AUD up a touch, the 10yr a little higher, and duration sensitive plays like property down a little. The broader market is up, but that is mostly just beta to international markets (European equities a little better overnight on fractionally lower concerns about France, the elections, and US markets continued to grind higher).

No change to our view, Canada, New Zealand are canaries in the coal mine, they’ve weakened to the point of cuts (Canada) or recession (NZ) and we think Australia will go a similar way. A mix of defensives is fine (cash, investment grade credit, government bonds) given the yields range from low 4%’s to high 5%’s, which is compelling in our view.

Periodically, as markets have dipped (in the case of Europe or Japan) we’ve added to pre-existing positions built out of bigger dislocations (Europe when the UKR-RUS war began, for example) or up from essentially zero on valuation grounds (small cap, Emerging markets), and that’s taken our overall equity positioning reasonably close to our SAA weight.

Our comments on defensives are less because we are bearish (even as we are nervous on Australia specifically) and more about those attractive headline yields, whilst we wait for the markets to break (or perhaps more accurately for the economic data to break) more cleanly in one direction or another.

Soft landing remains the base case, although the track record here for central banks (in terms of engineering one) is not great.

Perhaps the RBA said it best, “the outlook remains highly uncertain”, and in such circumstances one should look to the SAA weights, and, diversify.

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