Franklin Templeton Sees Australian Job Losses Driving RBA Easing

  • Money manager sees Aussie consumers hampered by debt, wages
  • Looking for opportunities to add duration if hikes priced in

A deterioration in Australia’s jobs market may drive the nation’s central bank to cut interest rates by early 2018, according to Franklin Templeton.

The money manager would likely see any significant increase in bond yields from current levels as a potential buying opportunity because any economic optimism is likely to give way to further signs of stress, according to Templeton’s Melbourne-based head of Australian fixed income Chris Siniakov. With household spending constrained by high debt loads, low wage growth and rising non-discretionary costs, he expects the labor market will be in for more trouble.

While a first-quarter slowdown was confirmed this month by gross domestic product data, Australia avoided the contraction some analysts had predicted, and the jobless rate remains in check at 5.7 percent. The swaps market is now pricing in about a 10 percent chance the Reserve Bank of Australia will lower its benchmark by year’s end, a switch away from the view just two months ago when an increase was seen as more likely than a reduction.

“Looking forward to 2018, we’re starting to see a couple of difficult areas for job growth, maybe even job shedding,” Siniakov said by phone last week. “Ultimately ,that is what will bring the RBA back into play, not necessarily just the low wages growth, but an employment market that’s having a particularly difficult time.”

Labor-market data for May is due to be released on Thursday in Sydney, with economists forecasting an eighth-straight month of employment gains that will leave the jobless rate unchanged.

The money manager’s bearishness on Australia is not entirely new. Last November Siniakov predicted the RBA would cut its key rate to 1 percent by around the middle of this year, although it remains unchanged at 1.5 percent. He said that, since then, the country has benefited from a period of strength in commodities and a more buoyant global growth environment and so he’s pushed back, but not removed, his expectations for additional RBA stimulus.

An Easing Bias

“We’ve been looking at the RBA really very much with an easing bias,” Siniakov said. “Any market talk and expectation for the RBA’s next move to be a hike is an opportunity for us to add duration into our portfolios.”

In assessing such opportunities, Templeton looks at short-end instruments and focuses on metrics such as the gap between the 90-day bank bill rate and three-year bond yields, Siniakov said. A move in that spread up through 25 basis points and toward 50 basis points is when the manager tends to start building positions. They’re currently quite close together and Templeton’s active duration position is pretty neutral, according to Siniakov.

While the RBA did last week acknowledge sluggish wage growth -- and its restraining impact on consumption -- the central bank still expects growth to improve. Rapid house-price growth has been cited repeatedly by Governor Philip Lowe among reasons for his reluctance to cut interest rates. For Siniakov, the key may be what happens with prices of everyday items.

The country’s central bank still needs to see data showing that broad-based inflation is undershooting its target and that growth is running at a below-trend pace before it might act, Siniakov said.

“The RBA is looking for other areas of economy to pick up and help bring wages up,” he said. “But we just don’t see where that’s likely to come from.”

Elsewhere, JPMorgan Chase & Co. on Wednesday pushed back its forecast for a looser RBA stance. The central bank will cut its cash rate by 50 basis points to 1 percent in the first half of next year, compared with the U.S. bank’s prior expectation for the same of amount of easing by the end of 2017, according to Sally Auld, senior rates strategist at JPMorgan in Sydney.

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