Antares Income Fund (PPL0028AU) Report & Performance

July saw a steepening in the back end of yield curves as Japan loosened its Yield Curve Control, allowing long term rates to trade in a wider range, and the US Treasury increased its borrowing estimates for the third quarter of 2023 to over one trillion dollars.

Market pricing reflected an increased probability of a soft landing as inflation eased amid a resilient US economy, overall strong US corporate earnings, and a perceived reduction in recession risk. In contrast, Europe and China are experiencing a more pronounced slowdown. China GDP was +6.3% in July vs +7.1% expected, and Eurozone GDP came in at +0.6%. There is uncertainty around the global impact of a slowing China but there is a growing consensus that it will continue to export disinflation in manufactured goods.

Central bank rhetoric over the month was that additional policy action may be required but that forward guidance would be data dependent from meeting to meeting given the uncertainty around the economic impact of the hiking cycle to date. Although headline inflation continues to fall, core inflation remains sticky, particularly around services, which was evident in the Australian July CPI data. Of particular concern is inflation from housing and rents, as strong demand is being met with supply shortages, reflecting a structural imbalance in the property and construction sectors.

Markets continue to unwind their expectations around imminent recession risks with continued strong economic data and sticky core inflation, causing markets to push out rate cut expectations from 2023 into 2024.

Term premiums were negative in June as yields moved higher in response to most major central banks continuing to raise rates. Even the Fed’s pause was deemed hawkish, as Powell acknowledged there is more work to do to ensure rates are restrictive enough for long enough to combat inflation. Major yield curves continued to invert.

Market pricing of the US terminal cash rate increased from 5.28% at the end of May to 5.41% at the end of June. Market timing of the terminal rate also pushed it out from July to November. Over the month, there was mixed US economic data, but overall, the data showed the economy remained strong, showing no clear slowdown trend. US housing starts and building permits beat market estimates, as did JOLTS Job openings, non-farm payrolls, ADP employment, and retail sales. GDP came in at 2.0% vs 1.4% expected, and US consumer sentiment was stronger than expected. On the inflation front, core inflation came in higher than expected at 5.3%, but other measures of inflation, including headline and the Fed’s preferred core PCE deflator, came in lower than expected. Unit labour costs, ISM prices paid, and ISM services also came in lower than expected.

There was softer economic data in the Eurozone, with inflation printing lower than expected except for the UK where both headline and core inflation came in stronger than expected and the Bank of England raised rates by 50 basis points. Most European central banks also raised rates, with ECB’s Lagarde providing forward guidance for further hikes. China’s recovery continues to stall. Annual inflation came in at 0.2%, the PBOC cut rates by 10bps, retail sales disappointed, and plans were announced for more stimulus and support for the property sector.

Australian yields were higher in June as the RBA made a hawkish pivot, hiking 25bps as the economy and labour market remained strong. Headline inflation came in lower than expected, driven by sharp falls in energy and travel. However, excluding these categories, inflation increased 0.5% month on month, showing core inflation remains sticky. Credit securities outperformed over the month as spreads narrowed in response to markets pushing out the timing of monetary policy tightening on corporate earnings.

Risk sentiment increased in May, driven by uncertainty around ongoing US debt ceiling negotiations, which saw a resolution towards the end of the month. Despite the ten plus rate hikes delivered by central banks over the past year, there is still a lack of definitive evidence of their impact in the economic data. This, coupled with continued strong wage, labour market, and sticky services inflation saw most major central banks hike 25bps in May. Markets responded by pushing bond yields higher and pricing in a higher rate structure for the remainder of 2023 to be more in line with hawkish central bank rhetoric.

The RBA’s 25bps hike in May was driven by mixed economic data and concerns over a wage price spiral without the productivity gains to match. The Fair Work Commission delivered a 5.75% increase to the minimum wage at the end of May. Rhetoric from the RBA throughout the month suggests the board is reviewing its stance on the tradeoff between preserving the gains made in employment vs their price stability mandate.

After multiple bank collapses in March, market volatility fell in April. However, markets remain nervous about broader global contagion risks from the US regional banking system. Macro data over the month showed increased risks to a stagflation scenario with elevated inflation and signs of weaker growth. The US continued to see mixed economic data with mixed manufacturing data, lower factory and durable goods orders, lower than expected GDP, mixed services data, higher one year inflation expectations, and stronger retail sales.

The labour market remains resilient despite some weaker data during the month. This was against a backdrop of Fed rhetoric questioning if they have achieved an adequately restrictive cash rate to bring inflation back down to their 2% target and markets trying to pick the peak of the rate hiking cycle. US core inflation levels remain at elevated levels. There was also mixed economic data globally, with lower than expected inflation in Germany and Spain and higher than expected inflation in the UK and France. Domestically, the RBA paused in April, waiting for the quarterly CPI data which showed sticky core services inflation and goods inflation coming off recent peaks. A key takeout from the RBA review was a change in the inflation target to the midpoint of the 2-3% target band and a new monetary policy board to be created.

Bond yields rallied, yield curves bull steepened, and credit spreads widened as the collapse of three US banks; Signature Bank, Silvergate Bank, and Silicon Valley Bank (SVB) and Credit Suisse rattled financial markets in March, raising fears of contagion across the banking sector and the broader economy.

The month started with markets pricing in a Fed terminal rate of 5.50% and an RBA terminal rate of around 4.20% off the back of continued strong economic and labour market data and a hawkish Fed reiterating rates would need to be higher for longer to bring inflation back to 2%. Markets were at odds with the Fed, pricing in a hard economic landing in the second half of 2023.

On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the second-largest bank failure in United States history and the largest since the 2007–2008 financial crisis. The response from US regulators and the Fed was swift to minimise the risk of market contagion. US regulators announced that all insured and uninsured depositors at SVB would have access to their funds. The Fed then established a Bank Term Funding Program (BTFP) which offered qualifying US banks the ability to borrow funds for up to 1 year by allowing long term US treasuries to be posted as collateral at par to avoid realising losses. There was also a strong global central bank response with liquidity provisions in addition to the Fed’s discount window liquidity facility. California’s First Republic Bank avoided a potential collapse after a group of firms provided a cash injection.

After the collapse of SVB, Credit Suisse (CS) also faced a similar bank run, which escalated after its largest shareholder, Saudi National Bank, refused to provide additional funding. CS sought assistance from the Swiss National Bank (SNB), and a deal was done for UBS to acquire CS for less than half the market value of its last closing price.

February was characterised by continued stronger than expected global economic data, sticker core and services inflation, strong labour markets and more hawkish higher rates for longer rhetoric from the Fed and other central banks. This has meant markets have pivoted from expecting that central banks were approaching the end of the hiking cycle, that peak inflation had past and a likely soft economic landing this year, to the prospect of reinflation and an extended hiking cycle. As a result, markets repriced terminal rates higher and pulled back on rate cut expectations for this year. In the US, unemployment reached a 50-year low, reiterating the strength of the labour market. After a spectacularly strong US payrolls print, markets also pushed out the timing of recession risks. Wages growth also remained strong, with the Fed acknowledging that the current level of wages growth is inconsistent with their 2% inflation target. This highlights the challenge central banks face in determining appropriate monetary policy settings to create a sufficient tightening in financial conditions to bring inflation back down to target while balancing the impact on the economy. The Bank of England and European Central Bank both hiked 50bps in February and flagged further hikes after upgraded growth forecasts and higher than expected inflation across the Eurozone. The RBA maintained its 25bps hike cadence after monthly CPI data suggested inflation had peaked, unemployment rose, tighter financial conditions impacted household consumption, and softer Wage Price Index (WPI) data suggested the risks of a wage price spiral remain low for now. However, it is recognised there was some seasonality in the unemployment data and limited scope of the monthly CPI and WPI metrics. As at the end of February global and domestic credit spreads remained contained with recession risks being pushed out off the back of continued strong economic data over the month.