This morning, Frank Uhlenbruch, investment strategist in the Janus Henderson Australian fixed interest team, released his latest Australian economic analysis and market outlook.
Uhlenbruch notes that the ever-increasing supply of government debt, alongside the US Fed's shift towards an average 2% inflation target, has spurred risk appetite to the benefit of shares.
Meanwhile, investors hunting for yield in the low rate environment saw a sharp lift in longer-dated government bond yields, dragging on the sector's returns.
Shorter-term Australian government bond yields were held in check by the Reserve Bank of Australia's (RBA) forward guidance and yield curve control measures. The 3-year government bond yield ended August at 0.26%, down 0.01%.
With an eye on potential rising inflation, the 10-year government bond yield climbed 0.17% to close the month at 0.98%, and the 30-year government bond yield gained 0.26% to reach 1.91%.
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Fiscal stimulus buoys retail spending
Uhlenbruch reported a 20% increase in retail sales between April and June. The overall 3.4% fall in the June quarter was better than expected, largely due to Jobseeker and Jobkeeper payments, alongside early access to Super.
Wages growth came in at just 0.2% for the June quarter, and unemployment rose slightly to 7.5% in July. The underemployment rate — those with work but seeking more hours — was more alarming, coming in at 18.7%.
According to Uhlenbruch, partial demand indicators show we should expect a historically large drop in output in the upcoming release of the national accounts.
Market outlook
The Janus Henderson Australian fixed interest team expects the economy to contract some 7% in the June quarter, with further pain in the September quarter. Uhlenbruch forecasts GDP to fall 5.75% in 2020 and grow 5.50% in 2021. He doesn't see it reaching end of 2019 levels until the beginning of 2022.
Uhlenbruch states: "This implies a massive build up in slack that will take years to absorb and will exert downward pressure on wages and inflation. The RBA have the unemployment rate peaking at 10% at the end of this year and falling to 7% by end 2022."
With an unemployment target of 4.5%, this means we can expect an extended period of accommodative policies from the RBA and the government.
Janus Henderson's Australian fixed interest team remains attracted to spread sectors. But the team has shifted, "from accumulating holdings following the widening in spreads over March, to becoming more selective about the names and tenors" it is adding.
The team expects spread sectors to be supported by low yields on government bonds and the huge amount of central bank support for both sovereign and non-sovereign debt markets.
The team cautions that inflation in the medium to longer-term is a risk, stating "We think it remains prudent to hold a core exposure to inflation-protected securities while inflation protection remains cheap."
