JCB has written extensively over the year about the FOMC and rate hiking expectations, stating that it was unlikely the FOMC could hike. That stance was lonely in June and September, when majority views indicated a coming rate rise. Ironically, the much weaker than expected September Non-Farm Payroll report in the US has actually opened the door for a FOMC rate rise in December ‘15. Let us explain.

The FOMC has told the market it is ‘’data’’ dependant. So the market watches the data to see the FOMC’s next move. The data was weak so the market assumed the FOMC can’t hike correct? No. The FOMC actually watches the market, so the market has rallied risk assets (equities) in anticipation of no FOMC rate hikes, but in doing has actually paved the way for the FOMC to hike rates by virtue of market strength. The logic is entirely perverse, but in a world of Quantitative Easing induced markets it is all about ‘’ow’’ With positive flows returning to equity assets, there is now a sufficient buffer to make the long anticipated move of hiking rates. As long as equity markets remain calm into December, JCB now expects the FOMC will hike rates, albeit by less than recent usual 25 bps increments.

We also expect any such FOMC move will be accompanied by dovish language, re enforcing a slow and gradual program of rates hikes in the US with a significantly lower terminal rate expectation than current market forecasts. Under this scenario, we see the rates complex being broadly benign to slightly higher in yield, within a tight valuation range, however the term structure will suffer from flattening pressure with short dated maturities under-performing.

Turning to Australia we have long anticipated the Q3 CPI data release would provide catalyst to return the RBA to the rate cutting table, despite their noted reluctance to provide further stimulus. After the change of leadership in Canberra, we moved our November ‘15 rate cut call back to Feb ‘16. Weak Q3 CPI on the 28th of October (at bottom of RBA targeted band) plus rate hikes from big 4 banks have solidified the probability of a return to actively lower RBA rates. In fact, short dated markets had the probability of a November RBA cut as high as 68% post CPI data, however, we believe the RBA will wait for the New Year (Feb ’16) before responding to the significant tightening of financial conditions in Australia from higher bank mortgage rates.

FUND HIGHLIGHTS & POSITIONING

JAMIESON COOTE BONDS ACTIVE FUND GAINED 0.85% GROSS DURING OCTOBER

We continued to hold lighter positioning as we believe the market will remain volatile. New bond issuance provided the best trading opportunities of the month with large supply concessions available in the new 24yr ACGB 39’s and new 13yr TCV 28’s bond which generated the majority of our performance for the month vs a at return on the index. Both issues came with a generous supply concession that we felt would normalize after the issuance process, hence providing excellent opportunity for the fund to harness. We had previously highlighted a preference for curve flattening exposure in the portfolio, however, over the month it became apparent that stability in oil prices, widening of US break-evens inflation rates, the begin CPI print in Australia plus mortgage rates hikes are all supportive of steepening exposure. We set steepening exposure throughout the month and will retain through the November RBA meeting.

We remain cautious on the RBA’s ability to deliver rate cuts in a short time frame into year-end, however post the CPI data we are very condent they will re instate an explicit easing bias at the November board meeting, thereby supporting the rates complex into 2016. We have moved the fund shorter in duration after a period of strong performance, reinvesting the proceeds in very short dated state government paper while we await better valuations to re invest. This adjustment has resulted in a higher month end holding of semi (state) government bonds whilst we await opportunity to buy longer duration assets.