Aussie market pricing in too much pessimism: Franklin Templeton

New commentary from Franklin Templeton’s fixed income arm has resisted the “disproportionately bearish view” exhibited by the local bond market, pointing to Australia’s “solid” fundamentals as not reason enough to warrant the “undue” pessimism.

Andrew Canobi, Director at Franklin Templeton Fixed Income, said the market’s take on the country’s economic outlook was too “bleak”, given Australia has basically avoided the brunt of the US’ taxing trade policies and is showing signs of stability with the labour market remaining strong, unemployment remaining steady and fiscal policy remaining “expansionary”.

Canobi said the market’s expectation of approximately five 25-basis-point interest rate reductions by the end of the year is uncalled for, reiterating the firm’s base case for the Reserve Bank of Australia to make only two more cuts. He said investors should look to the US for more “acute risks brewing”, given ongoing trade disputes and potentially forcing the US Federal Reserve’s hand in cutting interest rates further.

“The 90-day delay on the so-called ‘Liberation Day’ tariffs is only a temporary pause,” he said.

“The Fed won’t hesitate to act if unemployment ticks higher, even with core inflation approaching 4%. Chair Powell has already referred to the inflationary impact of tariffs as ‘transitory,’ laying the groundwork for policy easing.

“It’s surprising to see Australian markets pricing in a softer trajectory than the US, despite the latter facing far more direct downside risks. The Australian economy is relatively shielded from global tariff impacts. And if China ramps up stimulus, that could lift demand for Australian iron ore, offering upside potential.”

With the federal election completed, Canobi said there is “little evidence of a sharp deterioration in economic activity”.

“Unemployment is stable, inflation is moderating but not collapsing and it’s certainly not doing a bungee jump,” he said.

“We think the market has its wires crossed. There’s limited value in Australian duration at this point. We’re finding better risk-reward opportunities at the short end of the US curve.

“Cutting through the sentiment swings, Australia’s domestic fundamentals are solid enough to warrant a more measured outlook.”