Originally published by Commonwealth Bank of Australia
| ■ | Bond yields have crept back towards the top of recent trading ranges. Yellen and other FOMC members have solidified chances of a March 15th rate hike, now >90% priced. Yellen’s measured comments kept long end yields in check. |
| ■ | The RBA’s decision this week is simple, keep rates on hold and talk up the upside risks. We expect an upbeat assessment from the RBA in the wake of last week’s strong GDP report. But the data also points to weak inflation… |
| ■ | We remain short duration & extend targets on US OIS paid positions. We take profit on WATC 24s ahead of the election. |
US Treasury yields lifted last week as Fed speakers talked up risk of a rate hike at the 15th March FOMC meeting, which looks increasingly like a done deal. Market pricing for the meet is up to more than 90%, from less than 30% two weeks ago. 2yr yields have accordingly lifted around 14bp to a new 8‑year high of 1.30%. The sell‑off means Fed pricing isn’t as off the mark as it was a week ago when we decided to go modestly short duration in our Model Portfolio. But we’re happy to hold that stance. We have also revised our targets on June’17 and June’18 Fed fund futures, and dragged stops higher (see p5).
US 10-Year are up a similar amount over the past week, gliding effortlessly toward the top of recent ranges. But it’s still 12bp below the recent peak and we think has further to go. The US payrolls report on Friday is unlikely to provide the Fed or market much reason to pause for thought – the leading indicators look solid and the 190k consensus looks reasonably achievable. We think it would take a number closer to 100k to knock out the Fed for March.
ACGBs didn’t sell‑off as much as Treasuries despite stronger than expected Q4 national accounts data. The 45bp 10yr Aus‑US spread we targeted for new entry never arrived and we’ve squeezed back down to 33bp. We think it will range‑trade as 10yrs close in on the 2.93% mid‑December high.
The RBA meeting on Tuesday is the highlight of a quiet week in Australia. An upbeat assessment is likely but market impact should be minimal – the next serious questions won’t emerge until the Q1 CPI data in late April. As detailed on Wednesday, the household wages and income components of the GDP report point to downside inflation risk when that report comes. In the meantime, the bounce in commodity prices and the resultant terms of trade boost to nominal GDP is enough to keep the RBA out of the picture.
We think supply is the key to commodities this year. The demand story should be steady. Our China economist Wei Li maintains a view that China could beat its “target” GDP growth of around 6.5% in 2017. Stability is key. That should extend to views on the Aussie short‑end as well. We continue to look for the long‑end to drift higher with US yields and a slightly steeper curve.
The ECB will come into focus this week, if only for a short while. No decision is likely, with no pull‑forward of tapering. The market is jostling toward a taper announcement, which we think is six months premature. The French election, amongst other elections and risks, is still in play. The odds of a Le Pen win are falling. But any risk is still a risk that could end the EU, and demands attention.
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