Daily Flows

• For TDs, flow has been directed to 9-12 months tenor’s with rates hitting levels of 5.15%.
• NCD margins have remained elevated with credit spreads of +50 for 3 months in the BBB space.
• BBSW and Swap Rates are poised for movement today pending the RBA’s decision and accompanying rhetoric.
• Prior to the decision the yield curve is: Cash Rate 3.85%, 3M 4.05%, 6M 4.29%, 9M 4.24% and 1 Yr 4.18%.

RBA Day

• The first Tuesday of the month has rolled around again and the RBA faces a tough decision when it meets to discuss interest rates today.
• A case can be made for both a further tightening of policy as well as sitting idle and pausing for another month.
• While the monthly inflation read was high, base effect from last year was the main culprit with inflation pressures to ease over the months head.
• Last weeks minimum wage decision, while high, was not out of line with RBA expectations so it will have largely been factored it.
• Then there is the housing market activity which could pose issues if it gets out of control but Lowe’s recent comments suggest the RBA is well aware of it.
• There is mounting evidence that underlying demand is fading as seen in activity data such as retail sales, building approvals and lending data.
• Confidence also remains extremely weak amongst consumers and business sentiment is still soft.
• Economists, commentators and traders are all split on what will happen and it has been a very long time since I have witnessed so much uncertainty over the outlook for monetary policy.
• Market pricing on has 5bp of tightening of priced in for today’s meeting which suggest a move is unlikely. Further out there is 15bp priced in by July and a full hike priced in by August.
• My feeling is that the RBA’s job is likely done but taking their foot off the throat of inflation too soon would send the wrong message.
• A strong tightening bias will likely be with us for some time to foster the right behavioural response to higher inflation.
• The risk remains high that the RBA will still feel they need to do more to see the back of inflation, the big question is when will they deliver if they feel they have too?
• If they are certain the job’s not done then why wait and just go in June. If they are still resolute on returning inflation to the target band but want to also pursue a soft landing then the more prudent move would be to wait until August.