Kanish Chugh: Welcome to PIMCO’s latest trade floor update. I'm joined today by portfolio manager Rachael Boyte.
Rachael, today marks the first time that we've seen the RBA not hike rates in 2026. What does that mean? Have they shifted their stance?
Rachael Boyte: Yes, absolutely. We think that the RBA have finished hiking for the cycle. So the terminal rate’s likely to be 4.35. The three hikes that they've done so far give them a bit of space to wait and see what the impact will be on the economy.
If we look back to the start of the year, the things that the RBA were really worried about are starting to moderate. So inflation has come in a little bit lower than expected. The RBA are still alert to inflation risk but they're no longer alarmed about them. The labour market is not retightening.
The unemployment rate at 4.5% is quite a bit higher than the RBA had forecast. And then sentiment is deteriorating as well.
The conflict in the Middle East, as well as the impact of rate hikes so far, have seen business and consumer confidence fall quite sharply. That's coming through to activity data.
We've also had a bit of a softening in the housing market: the increase in borrowing costs, as well as the impact of the Federal budget, which had some changes to capital gains tax and negative gearing, have seen demand start to come off.
The auction clearance rate in Sydney was 70% a year ago. It's now below 50%. So we think that that will start to have a negative wealth effect and weigh on the consumer.
And the last point I'd make is that the Aussie dollar is doing a lot of the heavy lifting for the RBA. The Aussie dollar trade weighted index is up 7.5% over the last six months. That acts as an automatic stabiliser and brings inflation down naturally over time.
Putting that all together, the policy narrative is shifting away from inflation and towards the weakening growth outlook.
Kanish Chugh: With the change in the RBA's hiking rate stance, what does that mean for investors and their portfolios?
Rachael Boyte: There are three big implications.
Firstly, starting yields are very attractive right now. So the yield on a core bond fund is north of 5%. Starting yields do matter. Historically they've been very well correlated with future returns. At this mature stage in the hiking cycle when rates are elevated and also peaking, it's a good time for investors to lock in returns on their assets, in the same way that you would lock in the rate on your borrowing costs when rates are very low. So fixed income is quite valuable at this stage of the cycle.
Secondly, the market focus is shifting from inflation to the weaker growth outlook. At that stage of the cycle bonds tend to play their role as a diversifier in portfolios. They provide stability for portfolios through the cycle.
And the third point is that bonds are very attractive relative to other asset classes right now, so risk assets look expensive. Equities are very stretched versus historical valuations. Property prices are elevated and facing regulatory headwinds from the budget changes, which improve the attractiveness of income relative to capital gains. So fixed income is one of the few asset classes that looks genuinely cheap right now and provides a key role in portfolios in terms of defensiveness, income and also liquidity.
Kanish Chugh: Thank you Rachael for those insights. And to find out more information on PIMCO’s latest outlook and thoughts, please visit PIMCO’s website or speak to your account manager.