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AustralianSuper’s head of fixed income Katie Dean was among many speakers at the conference to challenge the market’s benign view of the future. She said wage inflation was a real problem for central banks because it is so “sticky” and pay rises could accelerate in Australia because labour markets and pay settings here lag the rest of the world.
Data on Wednesday showed core inflation – closely watched by the RBA – slowed to an annual pace of 6.6 per cent in the March quarter, from 6.9 per cent in December.
“We’re seeing significant disinflation in goods prices, but services, which are the more sticky part of inflation, are continuing to stay way too high,” Ms Dean said on Thursday. “We will see further rate rises, or we’ll be at that point where we need to start seeing some significant cuts,” she added.
Mr Aitken said the robustness of the economy could be seen at Brisbane Airport where “the greatest collision of high visibility vests and tattoos you’ll see on Earth” showed a real estate sector and a real economy “on fire, not just because of the Olympics, but people out there spending”.
“For all the [talk that] the RBA has done too much this, that and the other, it would be extraordinary to dispatch an inflation problem with peak real policy rates of minus 300 basis points. I mean, that’s laughable. So there’s more work to be done. There’s difficult decisions to be taken,” he said.
Still, Mr Aitken said it wouldn’t necessarily be a bad thing for the RBA to raise the cash rate further because it would show that underlying demand is stronger than people have understood, but those who misjudged and over-committed themselves to business expansions or real estate would struggle.
James Montier, a senior investment strategist at GMO, said the contrarian investors at the global firm had “had our butts kicked” as growth assets returned to favour in 2023 but viewed the current uptrend as a “something akin to a bear rally” which would unwind “pretty damn fast” should a recession – not a central case but a plausible scenario – eventuate.
James Aitken at The Australian Financial Review’s Alpha Live Summit: “The idea monetary policy is sufficiently restrictive is just absurd.”
He said GMO, a hedge fund founded by veteran investor Jeremy Grantham, had increased its equities allocation from last year because some markets had fallen in value and become attractive, such as emerging market equities – trading at single digit price to earnings multiples – and some out of favour Japanese and US value stocks.
Future Fund chief executive Raphael Arndt nominated gold and other inflation hedge commodities, while Matthew McLennan, a portfolio manager at First Eagle Investments, pointed to oil and gas and copper as hedges on both sides of the energy transition.
Research Affiliates chairman Rob Arnott said inflation is also expected to remain sticky globally and any receding of inflation would be “an illusion”.
“Inflation is almost certainly going to recede markedly in the coming three months. That has nothing to do with inflation subsiding and everything to do with replacing months (of low inflation) from a year ago,” he told the Alpha Live summit.
He said there were few instances of inflation rapidly retreating, and the current inflation had been exacerbated by the rebound from pandemic induced-demand suppression.
“If you have demand suppressed because of a pandemic-induced problem with supply chain disruptions, because of people being paid to stay home and not work, because of people working from home or pretending to work from home, as some will do, and if you have demand growing because of air drops of stimulus into people’s accounts … you’re going to get inflation.”
Gerard Minack, founder of Minack Advisors, was a minority voice arguing the RBA will not need to lift rates further.
Mr Minack said wage price index, hourly compensation and enterprise bargaining agreements data pointed to a “well-behaved” job market, and strong migration acted as a “very effective wage suppression” policy.
“The RBA’s [cash rate] can stay on hold, it does not need to go up any more,” he said.
The Future Fund’s Dr Arndt said inflation was “staying sticky” and the bond market “thinks there’s going to be a recession and rates will fall”, but “the equity market doesn’t seem too concerned about anything, which is a concern as well”.
The head of Australia’s sovereign wealth fund said that, while markets assumed inflation would return to the 2 per cent to 3 per cent band targeted by the RBA, “the risk is that it won’t”.
“The big issue is a stagflation – you know, an inflationary world with low economic growth – and what can you do in that world,” Dr Arndt said.
He told the summit this signalled caution about equity valuations and a lower exposure to risk assets to make room for traditional inflation hedges.
“We think commodity exposure – gold and other sort of inflation pass-through assets – are quite attractive at the moment,” Dr Arndt said.
Dymon Asia Capital chief executive Danny Yong does not see any leeway for rate cuts soon, largely because of the hot labour market in Australia and elsewhere. “We see a scenario where we have a mild recession in certain countries, including Australia, but yet full employment, and yet an inability for central banks to ease because of inflation,” he added.
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