Investment Strategy Group

JBWere’s CIO View: May Day - Inflation strikes again

Sally Auld, Chief Investment Officer | JBWere

Last week, Australia succumbed to the blight of unfavourable inflation outcomes. But unlike its US counterpart, we don’t think the RBA necessarily has the luxury of just sitting with a longer period of stable policy. The RBA has left itself with little or no tolerance for upside surprises to inflation, and the distribution of risks to both labour market and growth outcomes looks to be shifting in a slightly stronger direction. Investors should thus be attuned to risk that further rate hikes may be required in Australia. 

Important Notice: This content has been published on the website on 2 May 2024 and reflects our view at the time of publishing, however views and commentary may change after this date. This document has been authorised for distribution in Australia and New Zealand only. It may not be reproduced, adapted, transmitted, distributed or reproduced in any form by any process without the written consent of JBWere Limited. For more information, visit jbwere.com.au or contact a JBWere adviser today.

Advice contained in this article comprises general financial advice only and has been prepared without considering your objectives, financial situations or needs. Before acting on any advice contained in this article, you should consider whether the advice is appropriate for your circumstances. 

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Key Points:

• Australian inflation printed stronger than anticipated for the first quarter of 2024. In next week’s Statement on Monetary Policy, the RBA will likely revise higher near-term inflation forecasts and revise lower near-term unemployment rate forecasts. Both inflation and the labour market have been stronger than anticipated in the first three months of the year.
• A consequence of the RBA’s current approach to monetary policy – minimal labour market disruption subject to inflation returning to the target band over a reasonable time period – is that it has little or no tolerance for upside surprises to inflation. Hence we believe the Board will probably discuss the merits of a rate rise at next week’s policy meeting.
• Dynamics in both Canada and New Zealand should be sending an important signal to the RBA. In these economies, unemployment rates are now over 100bp higher than their cyclical troughs and inflation is at the top of or within respective central bank target bands. Cash rates in these economies are 5% (Canada) and 5.5% (NZ); perhaps a cash rate of this magnitude was what was always required in Australia for a successful disinflation.
• The spectre of a narrower interest rate differential between Australia and the US should be supportive for the AUD, all else equal. Hence we continue to recommend appropriate levels of hedging for foreign currency exposures in portfolios. Any rise in 10Y Australian government bond yields on a firming of rate hike expectations should be viewed as an attractive opportunity to add duration to portfolios. In the meantime, there is little urgency to switch floating rate fixed income exposure for fixed rate exposure.
• From a top-down portfolio construction perspective, the prospect of more restrictive monetary policy in Australia together with a delayed start to the easing cycle in the US suggests that defensively positioned portfolios remain appropriate. The risk to this view is a return of the soft landing narrative. As we noted in our recent Portfolio Strategy presentation, adding some exposure to the now attractively valued US small cap sector is a good strategy to partially ameliorate this risk.

For more information contact a JBWere adviser today.