Daily Commentary BY THE CURVE TEAM –

Interest Rates on the Move

20th of December, 2017

The RBA released the minutes from their December board meeting yesterday with the key theme being the arm wrestle between competing trends that will drive the outlook for interest rates. While the outlook for the cash rate is still in question, longer term interest rates were on the move overnight and it could be the beginning of a significant shift.

The key theme from yesterday’s RBA minutes was the arm wrestle between the improving outlook for growth and the benign inflation outlook being driven by subdued wages. There was once again the highlight of weak consumption over the past few months, with the RBA categorising the outlook for consumption as a “significant risk.”  

If you want to know what to look out for when it comes to the cash rate in the year ahead, all you need to do is read the second last line of the minutes where the RBA said:

“How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook”.

Governor Lowe has previously outlined the next move in rates is likely to be up. As to when that happens, the minutes suggest it largely revolves around wage growth. When it comes, it will be the precursor for inflation and thus the timing of any interest rate move higher.

While the arm wrestle over the cash rate will be the key theme over the year ahead, longer term interest rates are on the move. Overnight, global long bond rates shot higher. The move seemed to be driven by a jump in German Bund rates on the prospect of an increase in issuance over the year ahead.

The move saw US Treasury yields also jump higher and it could be the beginning of a much larger move. The US 10 year yield poked its head above a trend line going back to 1990 overnight. We have seen a few false breaks over the years but if this is the big one, long rates could head higher, much higher, in the year ahead.

It could be a big session today with the US tax plan heading to its final vote. The House of Representatives has approved the reconciled plan with the Senate voting on it Tuesday night US time which could have big implications for markets.

David Flanagan

Director - Interest Rate Markets