Daily Commentary BY THE CURVE TEAM –

Daily Insights – Inflation Surprise

28th of October, 2021

CPI

  • Inflation was 0.8% for the quarter, leaving it at 3% higher than last year.
  • Crucially, core inflation was 2.1%, so in the RBA’s target band.
  • Fuel prices contributed 0.27% points to the rise and house purchases 0.29% points.
  • In the latest RBA forecasts from the August Statement on Monetary Policy, core inflation was expected to be 1.75% by December before falling to 1.5% in June 2022.

Rate Moves

  • With inflation ahead of the RBA’s expectations, markets began pricing in a cash rate of 0.25% as soon as June 2022, whereas prior to the inflation number it was priced in for August.
  • The shorter end (i.e. 5 years and under) saw a jump in rates. The 1 year, 3 year and 5 year swaps were up over 10 points, over 20 points and over 10 points respectively. Swap rates are a benchmark rate for ADIs. When evaluating returns, it is useful to compare the yield you receive to these.
  • As of writing, the one year swap is 0.40%, the 3 year swap is 1.26% and the 5 year swap is 1.60%.
  • On the other hand, longer-end yields (i.e. 10 year terms) were down. This implies that raising the cash rate will result in lower inflation and economic growth in the long run.

TDs vs Bonds

  • The rise in yields has translated to higher bond yields.
  • However, TD rates have been stickier. As ADIs’ appetite for funds increases, TD rates should gradually improve and follow bond yields.
  • For the time being, bonds are offering higher returns should there be stock available.

Josh Stewart

Associate - Money Markets