We are not surprised markets are getting jittery toward the timing of rate cuts, having already highlighted it as a market risk a few times this year. However, we believe equities got ahead of bond markets in terms of pricing in rate cuts into Christmas as opposed to getting the ultimate outcome wrong. The Australian 3-year bond yield has been trading in a tight sideways range all year, awaiting a catalyst to drive them to a new level of equilibrium, and recent economic data and central bank comments haven’t made a dent in their comfort around the 3.7% level.
- We remain bearish toward Australian bond yields, targeting the 3% area for the 3s in 2024/5 – a bullish tailwind for equities.
Assuming our view is on point, stocks and sectors that have run hard over the last 6-months on hopes of rate cuts are likely to regain their “Mojo” when yields take a turn lower. Hence, today, we’ve focused on stocks we like into pullbacks if equities do correct over the coming weeks.
