Daily Flows

• With skinnier credit spreads in the ‘A’ rated space, market participants are increasing exposure to BBB names in order to increase returns.
• To maximise return, most have used a barbell approach, locking in TDs from ‘A’ rated names at the shorter end and BBB names at the longer end with levels significantly higher than ‘A’ rated counterparties.
• Tightness in the system is subsiding. ADIs are recalibrating their 3 month margins accordingly. However, +50 is still attainable in current conditions.

RBA Job done for now?

• Yesterday’s RBA minutes revealed the reasons behind the decision to hold interest rates, noting that “monetary policy was clearly restrictive at the prevailing cash rate”.
• This change in tone signals to the market that the RBA recognises that we are past a neutral stage, now it is more of a question of how high and how long is needed to return inflation to target by mid-2025.
• The board noted that Consumer spending has slowed as a result of higher inflation, increased tax payments, high interest rates and fixed-rate loans rolling off.
• The RBA will keep their eye on supply factors such as weak productivity which has been driving growth in unit labour costs.
• The tight labour market will also be a source of concern which they noted is currently at a level conducive to above-average increases in prices and wages.
• It seems the board is content with the current levels, further tightening will depend on how quickly inflation starts to subside and the evolving economy.