Originally published by Commonwealth Bank of Australia
- The RBNZ MPS is in focus Thursday. Our economists have pushed out their expected RBNZ hikes to a more realistic 2019 start date (from late 2018). The market is coming down from trainspotting highs, but remains far from realistic.
- In this week’s Weekly, we reiterate our favourite positioning in fixed income. Recent widening and currency strength suggests the stars are realigned to smash Antipodean spreads to US. The 3‑year spread is attractive, even in the 40s.
- The AOFM will tender a richening Nov‑27 bond tomorrow. We expect another solid result of 0.5bps through mid.
Daily Fixed Income Strategy
Aussie bond yields lifted marginally today. Sydney has returned from a long weekend, and markets are a little stagnant with yields little changed. The relative calm follows the large sell‑off triggered by a strong non‑farm payrolls in the US Friday night. The 10 year Aus‑US spread has compressed to about 37bp. There is much more room to move over the next two years.
The NAB business conditions index edged up by 1pt to 15pt in July, the highest level since 2008. The business confidence index also lifted 4pt to 12pt in July. The profitability sub‑index reported the largest improvement of 4pt. The recent sharp currency appreciation probably dented exports optimism, with exporters’ sales sub‑index declining from 11pt to ‑6pt. Labour costs also eased slightly to 0.6%qoq in July, which doesn’t bode well for wage growth outlook.
According to China’s latest trade data update today, both exports and imports have slowed sharper than expectations in July. In dollar terms, exports grew at a pace of 7.2% in July, down from 11.3% in June and below expectations of an 11% rise. Imports has also slowed modestly to 11% y/y, from 17.2% in June.
Tonight, Fed St. Louis President James Bullard (FOMC non‑voter) and Minneapolis President Neel Kashkari (FOMC voter) will speak. The main US data focus this week is July inflation data on Friday.
The RBNZ’s MPS will be flat for some, dovish for others.
The local highlight of the week will be the RBNZ’s neutral MPS on Thursday. Our second chart shows Kiwi pricing for RBNZ policy. The amount of RBNZ hikes priced in the market was once in a place of insanity (blood red), with maddening calls for November 2017. We have now graduated to a house of crazy (bright red), with recent ridiculous thoughts of even early 2018, softening to something within the realms of unlikely possibility (August 2018). We don’t see the RBNZ moving until 2019. There is still more to be drip‑dried out of the Kiwi short‑end. The Kiwi 2‑year is trading around 2%. The level is close to fair, given (25bp) to cash, but remains attractive to UST. And we continue to forecast a US Fed funds rate running up through and slightly above an RBNZ OCR for a time.
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