CFS Market Insights: Rates still rising?

Welcome to CFS Market Insights. So today I'm joined by Ben Lam who's CFS head of equities.

So this month, as we foreshadowed last time, we're looking at inflation, interest rates and productivity. And also why what we're seeing here in Australia is beginning to look a little different from what we're seeing in other markets.

So first of all we'll just turn to inflation expectations and interest rates.

So Australian consumers are already factoring in inflation of around 4% with expectations that prices will continue to rise.

So be interesting to get your thoughts, Ben, on how that sort of impacts outcomes for members and also markets.

Thanks, Jonathan. I think ultimately when inflation expectations become embedded, they really start to influence behaviour and over time outcomes. So what we have seen in terms of market expectations around inflation is that is clearly about 3% at the moment. What we are also seeing is this assumption that inter interest rate tightening cycle is largely behind us.

However, what we are seeing with market pricing is suggesting additional tightening.

Still reflected pretty much all across the curve.

I think what this really highlights is a disconnect between what the economic commentary is, market pricing and ultimately what households are experiencing on a day to day basis.

And I think that that's a very important element to sort of weave into how we're thinking about our own productivity, which is something that is getting a lot of focus now, particularly because Australia's productivity has weakened quite a lot over the last several years. And now sort of actually looks as if it's at the bottom of the list of, large, large open economies.

Yes. And productivity is a significant issue. Because ultimately, interest rates and inflation all, come back and, influenced by productivity. So what we are seeing now with government spending in Australia sitting roughly around 35% of GDP, that's roughly 7% higher than a decade ago.

And I guess what, we see relative to some other markets globally, particularly the likes of the UK and France, who are spending even more, as a proportion of their GDP, as a government, also very weak productivity. And we see some kind of issues there. Ultimately, what we see in Australia as well, in terms of the government spending, a lot of it is, directed towards health care and education, very important sectors.

But ultimately not drivers of productivity.

So over time, we'd also expect that, technology and automation should have a positive impact on productivity, although adoption tends to sort of move at different paces depending on which area of the economy it is. So be interesting to get your thoughts about how that could impact productivity growth.

Yeah, I think it's not going to be a smooth ride. It's one of those ones that we will see, some gains over the long term. But what the path of that looks like will also provide some challenges. So whether there's potential disruption, in different areas as you drive, the use of technology, that will be a critical thing for us to continue to monitor and assess.

So one of the areas that has been a source of productivity improvement historically has been the resources sector. And any discussion about resources obviously brings us to Australia's relationship with China. And how important that is and also how that's continue to evolve. One of the things that is quite striking in the last 2 to 12 months or so is that the historical relationship between the Chinese equity market and the Australian equity market has broken down.

Be interesting to get your thoughts about, the impact that China is going to have going forward, particularly when it comes to looking at areas like iron ore and also rare earths?

Yeah, I think that's a fascinating development, particularly around that reliance historically on iron ore and the Chinese kind of growth in infrastructure spend over time, which has contributed significantly to Australia's economic growth.

With this movement to more services and tech within China, ultimately that has different drivers from that from their economic perspective. So as you highlighted, other commodities such as railroads, copper, lithium and the like, actually going to be, very important and critical for Chinese kind of economic growth going forward, and not only just China but other parts of the world.

So Australia, again, is placed in a pretty good position with the resources sector, really helping to potentially offset some of the kind of broader, economic, challenges.

So I think if we sort of trying to bring those sort of things together, certainly in the short term, it seems that Australia is very much on a different interest rate cycle from many other, major economies as, it seems likely that interest rates may rise, a little bit further from here. On the productivity side of things, there are a number of sort of opportunities coming forward, but they're likely to be slow burn.

And that certainly because of some of those structural issues, you're actually going to continue to see Australia's productivity probably lag some of its major peers.

No, I think that's a fair summary.

Thanks for watching CFS Market Insights. See you next time.