RBA optimism permeating market pricing – TDS

Annette Beacher, Chief Asia-Pacific Macro Strategist at TD Securities, suggests that the RBA maintained its upbeat view on the domestic economy in its latest Statement on Monetary Policy.

Key Quotes

“Although constructive on global growth, it noted trade-war-related downside risks. On Tuesday the Bank said its GDP growth forecasts were revised up to 3 ½% and the labour market was tighter, the unemployment rate reaching 4 ¾% in 2020.”

“After the recent as-expected dip in core inflation to 1 ¾%/y, the Bank brought forward its 2 ¼% projection from 2020 to H2 2019, a slightly hawkish twist.”

“The RBA shifted its “key uncertainty” from consumer spending to wages and income growth, placing even greater emphasis on Wednesday’s Q3 WPI (TD and mkt 2.3%/y). The downturn in housing (prices and eventually construction) doesn’t appear to concern the RBA at this stage.”

“The AUD broke out of its 2018 downtrend earlier this month, and we suspect the lows have been set for now, while 3yr bond rates close the week at 2.12%, top of the range set since June. It feels like the RBA’s optimism is creeping into market pricing at last.”

“August 2019 OIS is 48% priced for +25bp, lifting to 68% by November (and fully priced for February 2020).”