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2 Jun 2023 - Hedge Clippings | 02 June 2023

By: FundMonitors.com

    

Hedge Clippings | 02 June 2023

Phillip Lowe had a subtle shot at politicians this week, and Treasurer Jim Chalmers in particular, when fronting a Senate Estimates hearing in Canberra, asking the Senators to consider whether fighting inflation should only be left to the RBA?

"In a perfect world, you'd have a different set of arrangements," Lowe proposed. "The other way you could reduce aggregate demand at the moment is to increase taxes or reduce government spending." Of course that might involve some of the senators in question losing their jobs, which they'd rather not do. He could also have added something about the government not supporting wage rises, but sensibly kept away from that, even going so far as saying he didn't think the budget was adding to inflation, but actually reducing it.

It's still unknown if Lowe will keep his job when his term (or time) is up in September, and Chalmers has given no hint of support, suggesting that he won't. Whether he does or not is unlikely to change his successor's focus on inflation, and therefore the upward direction of interest rates, even though Lowe's claims that the 11 rate rises over the past year are working. The Fair Work Commission's 5.75% increase in minimum wages awarded to 2.6 million workers, and 8.6% for 180,000 on the lowest rate, won't be helping when the RBA announces the outcome of next Tuesday's board meeting. As a result, a bevy of bank economists are forecasting a further 0.25% rise, with some now suggesting that a peak of 4.6% - or three more increases - is not out of the question.

Not only are interest rates a blunt instrument with which to manage inflation, their effect on the economy is a lagging one. As a consequence, when the results show up in the statistics the RBA use in their monthly determinations, the tipping point in the economy has already occurred. Hence rates inevitably rise (and fall) too far. For many people - those under mortgage or rental stress, or minimum wages - that tipping point has already occurred, so if a cash rate of 4.6% is on the cards there'll be some serious pain, and certainly Lowe's increases will have worked.

Even if he's not going to be there to take the credit - or the blame - when or if inflation returns to the 2-3% target, and rates gradually follow suit.

On Tuesday afternoon next week at 4.15 we are holding the next in our series of Fund Manager Round Table Webinars, this time focusing on the Hybrid Credit sector. Register here to join Ben Harrison from Altor Capital, Nick Thomson from AquAsia Funds Management, and Patrick William from Rixon Capital for their take on the opportunities and risks for the sector.


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