By Matt Bell
Wilson Asset Management portfolio strategist Damien Boey said investors are taking the a sharper-than-expected decline in inflation as dovish, endorsing an August rate cut.
The 2.1 per cent annual increase compared to an expected 2.2 per cent has seen the ASX 200 hit an intraday high along with an increase in bonds.
“This is above what the RBA forecast in its May Statement on Monetary Policy (SoMP) for the quarter. However, it is also worth noting that RBA Governor Bullock has also said that movement in inflation towards 2.5 per cent would be adequate to consider cutting rates again,” he said.
“We highlight that activity growth is picking up, and is likely to outperform the RBA’s forecasts. Stronger growth offsets the impact of lower inflation to a degree in the Bank’s reaction function, as do higher-than-expected oil prices.
Australian 3-year yields are pricing in multiple cuts after August, which, we think, is a bridge too far in the circumstances. We think that Australian short-term bond yields are at risk of rising, and that the yield curve could flatten, subject to global developments. Higher bond yields could undermine crowded names in the equity market.”
