Daily Flows & Commentary BY THE CURVE TEAM –

Daily Flow & Insights – Data Sings Same Inflation Song, RBA to Hike

Monday, 1st August, 2022

Daily Flows

  • Friday saw a further fall in reference rates, particularly in the back end of the curve.
  • Investors largely sought after the front end of the curve, turning to Macquarie who are offering over 2.70% for 3 months.
  • A domestic BBB continued to offer discretionary rates, with attractive returns across the curve. The 6 month was most popular on Friday at 3.50%.
  • Most significantly, flows were vastly different throughout the course of the week in response to reference rates. The rally saw 3-month BBSW fall by 17 basis points, 6-month by 28 basis points and 1Yr Swap by 39 basis points, all between Wednesday and Friday.

Data Sings Same Inflation Song

  • Data released on Friday out of the U.S. sang the same inflation song.
  • PCE core deflator increased 0.30%, printing 1% MoM, and 4.80% YoY. PCE Deflator printed 1.00% MoM, up 0.40% and YoY increased to 6.80%.
  • The significance of the data is that the inflation curve may not have peaked and there may be some more distance to travel.
  • Employment Cost decreased by 0.10% to 1.30%. However, as the labour market remains incredibly tight, wages growth is likely to remain persistent for the foreseeable future.
  • Personal spending increased from 0.20% to 1.1%, for the month of June. Whilst the increase is largely due to inflationary pressures and therefore an increase in spending, it does reflect the period since the Fed Hiked by 75 basis points. Real personal spending only increased by 0.10%.

RBA Tomorrow

  • Eyes turn to the RBA tomorrow who are expected to lift the cash rate by 0.50%.
  • Since the CPI data last week, the market has diverged in views, with some saying that 50 basis points is no longer necessary.
  • However, some people are asking for the RBA to forward load rate hikes and to jump on inflation quicker.
  • Many people are also asking the RBA to hike to a clean 25 basis point increment. This remains unlikely.
  • Headline inflation missed by a whisker, and still printed 6.10%. Core inflation increased by 0.20% YoY, printing at 4.9% – a print which is the reverse of other global economies, who are seeing core inflation subside and headline accelerate.
  • Inflationary pressures around the world are being caused by supply chains, energy, commodities and food prices. The Australian economy is founded on energy, commodities and agriculture. As such, seeing an increase in core inflation is more concerning, given that Australia is somewhat immunised from external inflation factors.
  • The RBA will still be compelled to tackle inflation, after stating that it is their “core objective”.

Nicholas Allan

Senior Associate