00:00A lot is shifting at the moment and one of my colleagues said, I remember when we had Adam on
00:04last,
00:05early in the year, you were looking to buy Australia bonds on the expectation that potentially
00:11a hawkish RBA would tip the economy into a recession. They now want to know, is this now
00:16a much bigger buying opportunity? Is this the buying opportunity of the decade?
00:19Yeah, look, I'm constructive on the Aussie bond outlook. You mentioned the fiscal backdrop already,
00:24you know, much more constructive here. I think Aussie bonds look attractive on their own right,
00:28but also relative to other markets. We have a pretty mature hiking cycle and it's priced,
00:35I think it looks fully priced up with cash rate expected to get up to around 5%. And, you know,
00:41growth trajectory here, quite different to the US. You know, signs of growth slowing,
00:48the unemployment rates ticking higher and demand for Aussie bonds remains really strong.
00:54So it's still quite constructive on the Aussie bond market.
00:585%. Is that where you think we'll end up?
00:59No, I think, I don't think they need to get there. That's where the market's priced.
01:02Yeah.
01:02So even if they do get there, you know, that's fully priced. You know, at, you know, if they
01:08hike tomorrow, which is largely expected, I think they will, it takes us to 460. We haven't had that
01:14rate since 2011. If they go again before year end, like the market's expecting up at 485, we haven't seen
01:20that since 2008. Remember last time we were at 435, Australia had a two year per capita
01:27recession. It was only surging immigration that stopped an outright recession, which we're not
01:32getting this time. So I think policy is already restrictive. You're seeing that in growth momentum
01:36slow. The market's fully priced the cycle up to 5%, which looks really fully priced.
01:41Yeah. Tell us about that recession risk that you see or don't see at this point, because
01:45this time, a lot of the inflation pressure is outside of the RBA's control.
01:49Yeah. And look, I think what they're trying to do, and you know, the Fed and the RBA are
01:53trying to do, they're trying to bend inflation back to target without breaking the economy.
01:58But I think economic cracks are more visible here. You know, growth is materially slower.
02:04So if you just look at real growth, the first half of this year, it was about half the pace
02:09it was of the second half of last year. Unemployment rates rising, not falling. House prices
02:14are falling, not rising. And fiscal backdrop, very different. So I think, you know, as I
02:20said, they're trying to bend inflation back without breaking the economy, but cracks already
02:24visible. So there are recession risks. There's always recession risks. And recession is not,
02:28you know, certainly not my base case as we head into next year. But the further they push
02:32it, particularly with rates, if they get up to around 5%, I think recession risks are real.
02:37Relative attractiveness? What's sort of the demand side looking like for Aussie bonds?
02:40The demand backdrop is incredibly strong. I think there's a couple of things driving
02:44that. You know, we've got yields, starting yields on active core bond funds and all the
02:516%, which is very attractive. So I think the adjustment higher interest rates is seeing
02:56a global allocation into fixed income. And places like Australia are probably receiving
03:01a bit more of their fair share than usual. And so whether it's across Commonwealth government
03:06bond issuance, state government bond issuance, corporates or securitised, demand is really
03:10strong, which is a big tailwind for local market.
03:13Where on the curve do you see the best opportunity?
03:15I think 5 to 10s. You know, I think there are risks on the policy cycle in the next couple
03:22of months. So next couple of months, as I said, I don't think they need to get 5% but
03:26that's what's priced. And we do have some fuel inflation coming through in the next couple
03:31of months. So there's really uncertainty over the next couple of months. Beyond that,
03:35where I think the value is, is the market's pricing, the cash rate to still be around 5%
03:39in a couple of years time. And I don't think the economy can handle that. So somewhere between
03:445 and 10 year yields in the belly of the curve look really attractive. You know, you avoid
03:49the fiscal pressure from global markets at the long end and capture that really attractive
03:56yield.
03:56Have you got a view on the Aussie then?
03:58No, not a strong view. Look, I think if you look at most models of the Aussie dollar,
04:05you know, it looks a little cheap relative to interest rate differentials in terms of
04:08trade. But as I said, with kind of growth risk materialising into next year, I don't
04:14think there's enough of a sort of an attractive valuation buffer there to get particularly
04:19excited.
04:19You've talked about the fiscal impulse moderating, if not slowing. I do want to have some of
04:25the bigger picture, kind of longer term structural themes way into the outlook, right? The data
04:30centre build out, for example, AI and productivity. Do you sort of model that?
04:35Absolutely. Yeah. So fiscal is a big theme and much better in Australia versus other countries.
04:39The AI investment rollout, data centre rollout is real. And we think that'll be a source of
04:46growth resilience for the next couple of years. There's nothing like the mining boom. I know
04:50some people are comparing it to the mining room.
04:52False comparison.
04:53It is in the mining room 2.0. There isn't a terms of trade boom associated, a national
04:57income boom. And just the level investment relative to GDP isn't big. So yes, it's resilient
05:03growth story. And it's going to be a tailwind for the next couple of years. I don't think
05:06it's going to drive the economic cycle. That is still going to be households and house
05:10prices. And so at least on the investment thematic resilience, but not a sort of mining
05:16boom 2.0. And then productivity is very different here. We've had no productivity for more than
05:23five years. Very different to places in the U.S. where it is growing at 2% a year. So
05:29I think if you look at the productivity implications for the productive capacity of the economy or
05:35trend growth, much lower here than in the U.S.
05:37Budget books might be looking well, perhaps not so for the household. What are the weaknesses
05:41that are under the hood?
05:42The long term fragility for households is just the debt levels. You know, even at a
05:47cash rate of 435 in Australia, where it is now, even if they don't hike again, which
05:50as I said, they almost certainly will tomorrow. Household payments to service debt and pay their
05:58taxes as a percentage of their income are just near all time highs. Much higher than during
06:03the mining boom when the cash rate was above 7. Much higher than the 70s, 80s when we had very
06:08high inflation. That's just because the household debt and leverage is very elevated relative
06:13to what it has been and relative to other countries. So that's the kind of structural fragility
06:17for households as interest rates move higher. And I think you're seeing that in real spending
06:22growth slowing and house prices starting to come down.
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