Daily Commentary BY THE CURVE TEAM –

Weekly Insights – Central Banks Challenge the Market

15 November, 2021

Key Updates

  • Tuesday – RBA Minutes and Governor Lowe speech.
  • Wednesday – Q3 Wages.

Central Banks Challenge the Market

Inflation and central bank hikes in the developed world are under pressure. Despite central banks believing current inflation is transitory, consistent high inflation is challenging that outlook.

Australia has been more subdued but is under pressure. Core inflation has hit 2.1% annually and wage growth is released on Wednesday. This is a critical update, as a high number could be the impetus for the RBA to increase the cash rate as soon as mid next year (as markets expect).

On the other hand, a low number could verify the RBA’s outlook. Their opinion is counter to the market, with the RBA believing 2022 will not have any rate hikes. But high wage growth and core inflation in the target band could shift the RBA’s outlook. Wages are expected to rise 0.6% for the quarter, which would amount to 2.2% for the year.

Already yields have fallen sharply following the RBA meeting two weeks ago. They rose after US inflation last week. This makes investing difficult.

There is a bias to anticipating higher rates, but volatility in fixed income markets is underrated. As investors, comparing TD rates to fixed bond rates is a simple way to gauge whether a rate is reflective of the current market. At the moment, TD rates have been slower to move than the bond market.

Josh Stewart

Associate - Money Markets