Daily Commentary BY THE CURVE TEAM –

Weekly Insights – Shift From Markets and the RBA

8 November, 2021

Key Updates

Tuesday – Business Confidence and Conditions for October

Wednesday – Consumer Confidence for November

Thursday – Employment for October

Shift From Markets and the RBA

Market rates have shifted to what appears to be a new high. The RBA removed the yield curve target on the April 2024 government bond. Their forecasts were also upgraded in the November Statement on Monetary Policy.

They expect core inflation to be 2.25% until June 2023 before increasing to 2.5% in December 2023. Whereas the forecasts for August had inflation below 2% until June 2023 and hitting 2.25% by December 2024. That amounts to core inflation being within the target band two years earlier than the RBA expected.

Despite this upgrade to the forecasts, the RBA have held the line on their expectation that the cash rate will not rise until 2024. However, they have positioned themselves such that should they need to increase it earlier they can.

Accounting for higher than anticipated inflation, rates across the curve jumped prior to the RBA meeting. This increase was in addition to the run up in yields over the previous month, with New Zealand CPI and the BOQ primary bond issue seeing spikes in yield. Following the RBA’s dovish take on the cash rate being unchanged until 2024, yields unwound a chunk of their gains (around a 20 basis point drop in swaps from 2 to 5 years).

The next key update will be wages data on 17 November. It could re affirm the RBA’s dovish position or the markets hawkish position. Over the medium term though, markets are already pricing in RBA hikes as soon as mid next year. Therefore, there are opportunities to invest at higher yields now. These will prove worthwhile especially if the RBA’s position ends up being correct.

Josh Stewart

Associate - Money Markets