Daily Commentary BY THE CURVE TEAM –

Hello

24th of September, 2018

The end of the quarter is drawing to a close and it is set to be interesting from a markets perspective, especially an interest rate point of view. There are a number of events and developments to be aware of which could shape interest rate markets.

Domestically it is set to be a quiet week when it comes to data releases with the only highlight, the latest monthly credit figures from the ABS due out on Friday. That doesn’t mean it will be a quiet week in terms of interest rates.

Funding markets are tightening once again as the end of quarter draws closer but not to the extent that we saw at the end of the June quarter. While BBSW has remained quiet and we haven’t seen the ramp up that many had expected, we are seeing repo rates lifting by the day, pointing to increasing tightness in funding markets.

Long term rates have also been on the rise, caught in the updraft of rising long term rates in the US. That makes this weeks FOMC meeting even more important as it could have implications for our own setting of monetary policy.

The market has continually underpriced the tightening cycle and rightly so after the FOMC baulked so many times at the outset. Since the tightening cycle really got underway, the FOMC has been clear in the magnitude and speed of the cycle yet the market remains unconvinced.

That underpriced position by the market heading into this months meeting could see a sharp move post meeting if the FOMC comes out with a hawkish hike as some are expecting. That is certainly what the most recent rhetoric from Fed members before the blackout period suggested.

Adding fuel to the potential uplift in volatility this week is the ongoing back and forth on the US-China trade war after the Chinese pulled out of the next round of talks. Then there is also Brexit which is getting messy again as recent optimism that will get done has dissipated.

David Flanagan

Director - Interest Rate Markets