Ying Yi Ann Cheng: The Reserve Bank’s Surprise Decision

Ying Yi Ann Cheng, Portfolio Manager of the Switzer Higher Yield Fund appeared on Switzer TV to discuss the Reserve Bank’s recent decisions and how surprising it was.

Video Transcript

Peter Switzer (PS): Joining me now is Ying Yi Ann Cheng from Coolabah Capital. She has a portfolio there, and that company manages the Switzer Higher Yield Fund as well. She is our interest rate expert, and we all care about interest rates. Tell me this, Ying Yi, do you think the lockdown and the potential economic implication of the lockdown will actually mean that the Reserve Bank will be on the sidelines for a lot longer than some people were expecting?

Ying Yi Ann Cheng (YYAC): That’s a very good question Peter. I mean, there definitely is a bit of a shock from the latest lockdown. However, having said that, markets haven’t been pricing in RPA rate hikes for quite some time. As we’ve spoken about in the past, they’re doing quantitative easing, i.e.) they’re buying Commonwealth government bonds and state government bonds. So we would expect that they taper back on these bond purchases first, before they actually start hiking rates in the future.

In terms of implications for the RBA, looking at the lockdowns, if we do have economic sort of activity turning down, which is going to be very likely the case in Q3, and possibly Q4 this year, then it may be the case that they decided to delay that taper on their bond purchases, which would then, arguably potentially push out rate heights into the future.

We think that they don’t hike rates in 2022. Our base case even before lockdowns was that they will probably start thinking about hiking rates in late 2023, or possibly 2024. It may be the case that if economic activity doesn’t necessarily bounce back as quickly, despite higher vaccination rates, et cetera, that some of those rate hikes could be pushed out, but it’s still a long time yet.

PS: Were you a little bit surprised at this, the Reserve Bank stuck to its guns in talking about reducing the taper? Because I think when they first introduce it, you’re a little bit surprised. I must admit when I heard the way the economy is going and NAB even thinks the June quarter could’ve been a small negative, which means that we’re in recession now. I think that’d be wrong, but that’s a possibility, I thought the Central Bank would say, well, look, we’ll hold back on reducing our taper, but they didn’t. Did that surprise you a little?

YYAC: Yes, that did surprise me. In fact, we weren’t alone. We thought that maybe they would stick to their guns in sticking with $5 billion a week. And, in fact banks like Westpac, Westpac’s Bill Evans, who I’m sure you’re familiar with, was calling for $6 billion a week. The fact that they stuck to their guns and said, look we’re going to do $4 billion a week starting from September reflected something that they were looking at their forecast, rather than looking at the data in front of them or what could possibly pan out.

We were dealing with an RBA, which seemed to be ‘glass-half-full’. In that respect, I think the point that they did emphasize in the August meeting last week was that they said they would be flexible, right? So, it could be the case that we get to the September meeting. They say actually, because of this flexibility, and because of the way that the data has panned out, we may not choose to move to $4 billion. That’s still a bit of a question mark because we’re yet to sort of see. We know what the implications could be, but obviously it takes a bit of time for job losses to feed into the data. When we do get the next set of jobs data, the July data, because not everyone was in full, proper, lockdown – people arguably may not have lost their jobs yet that wouldn’t necessarily be reflected in the jobs data either. Even if you worked for one week in the month of July, you’re still technically considered to be employed.

PS: Okay, let’s go to the U.S now because they got a very good job number, the bond market got confident again. So, yields rose, and tech stocks suffer as a consequence. What’s your take on the U.S economy and the bond market over there, because ultimately, what happens in the bond market over there is going to have an impact on our stock market as well. I guess if the Fed raises interest rights ahead of schedule, would that put pressure on our Central Bank to follow suit?

YAAC: Ultimately, we do believe that the U.S will hike rates before Australia does. The US and Australia were in slightly different situations before COVID anyway. The RBA had the issue of pre-COVID. They actually weren’t meeting their inflation and employment objectives, whereas in the U.S, it was a slightly different story.

Now, the US is obviously bouncing back, there’s economic activity. They’re obviously running a very different policy to the way that we’re running our country, right? We, rightly or wrongly, politically sort of speaking, we are heading towards zero cases. At least that’s how the states are individually running this sort of mandate, whereas in the U.S, they focused on vaccinations. So, obviously they’re ahead of us in that vaccination sort of program. People can freely travel, obviously there’s some sort of health restrictions that we are seeing, and maybe that does provide some sort of a template for us in the future.

Whether we need to get some sort of vaccination passport, or proof that we are vaccinated, et cetera. However, their economy is playing out because they are getting that economic rebound. That’s probably a template for how we would probably look next year, but until we get our vaccination rates higher, it’s unlikely that we’ll see that.

In terms of the U.S, you mentioned, would they start hiking rates and look, the central bank over there, the Federal Reserve have said that they would taper back and heading into Jackson Hole, which is the key central bank meeting, I suppose, on the economic policy calendar. It does seem that there’s a bit of almost like a coordinated effort amongst the central banks to really seek to that ‘we are going to taper’ talk. We’ve seen if from the Bank of England recently, we’ve seen it from the Federal Reserve. Even to a certain extent, the RBA as well last week.

It’ll be interesting how that plays out, but, the Delta variant, as we know, is very rampant, and we’re seeing an escalation in cases offshore. To a certain degree, you could argue the central banks are probably thinking, ‘hey, we’ve actually done enough, we’ve been supporting the economy since last year – what more else can we do?’ So, that’s something to bear in mind. I guess we’ll sort of wait and see.

PS: One last question, because we have been, for me, pathetically pessimistic, which I don’t like being, but let’s get it. Let’s skip into the 2022 and you kind of implied it. I think this will happen, if National rates are good by December, January. I think it prepares us for a really strong 2022. Is that a fair call?

YYAC: Yeah, I think I’m quite bullish on 2022 as well. I think you’ll get a bump just purely from economies re-opening. You could have potential rate basing effects on one hand, but the fact that there’s all this pent-up activity because businesses just simply can’t operate. People can’t actually go out that’s going to be fully open in 2022. You probably expect wages and inflation to pick up and that potentially does open the door for the RBA to start raising rates in 2024.

PS: A hairdresser friend of mine said to me, if these lockdowns don’t end soon, we’re going to lose half a million of blondes.

YYAC: That’s awesome.

PS: And I think that’s what’s going to happen. There’s going to be so many people wanting to go to the hairdressers…

YYAC: For sure! For sure!

PS: … Wanting to go to restaurants, wanting to do stuff. That’s going to really be a big economic boom in 2022 and people should be investing accordingly, I reckon. Ying Yi Ann Cheng, thanks for joining us on the program.

YYAC: Thank you so much Peter. Take care.

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