Markets Overview

  • ASX SPI 200 futures up 0.7% to 7,584.00
  • Dow Average up 0.2% to 38,451.31
  • Aussie up 0.5% to 0.6518 per US$
  • U.S. 10-year yield fell 6.6bps to 4.0923%
  • Australia 3-year bond yield rose 1.9 bps to 3.70%
  • Australia 10-year bond yield rose 3.1 bps to 4.13%
  • Gold spot up 0.5% to $2,036.16
  • Brent futures up 1.0% to $78.78/bbl

Economic Events

  • 11:00: (AU) Australia to Sell A$800 Million 2.75% 2028 Bonds
  • 16:30: (AU) Jan. Foreign Reserves, prior A$93.9b

The world’s biggest bond market rebounded, with traders gearing up for a record $42 billion sale of 10-year Treasuries after a solid start to this week’s ramped-up issuance sizes.

Following a selloff that drove two-year yields to their highest since before the Fed’s December “pivot”, bonds climbed. A $54 billion sale of three-year notes drew solid demand, bolstering sentiment and making traders shrug off a slew of cautious remarks from Federal Reserve speakers. The S&P 500 saw a small gain.

Other News

Australia’s central bank left interest rates at a 12-year high and signaled further tightening remains possible, joining global peers in pushing back against expectations for near-term easing and sending the currency and bond yields higher.

The Reserve Bank maintained its cash rate at 4.35% — as predicted by economists — on Tuesday, and said in a post-meeting statement that “a further increase in interest rates cannot be ruled out.”

At her inaugural conference following the rate decision, RBA Governor Michele Bullock reiterated the board’s hawkish stance as she emphasized that inflation remained “too high.” The messaging prompted the currency to rise against all its major peers and swaps traders to bet the RBA will trail counterparts from the Federal Reserve to the Bank of England in policy easing this year.

“We are not ruling in anything or out anything,” Bullock said. She signaled that taming inflation was taking priority over the desire to provide relief to heavily-indebted mortgage holders, saying “we need to stay the course.”

The governor defended the RBA’s surprise November interest-rate hike, noting it was needed to guard against upside risks to inflation. Risks now appear “fairly balanced,” she said.

The Australian dollar rose as much as 0.5% to 65.17 US cents, while yields on policy sensitive three-year government bonds were up 2 basis points to 3.70%. Swaps traders now see the chance of a June rate cut at 42% from about 50% beforehand, according to data compiled by Bloomberg.

The RBA “retains a mild tightening bias in contrast to the Fed, BoC, ECB and BoE,” said Su-Lin Ong, chief economist at Royal Bank of Canada, adding the statement was “more hawkish” than markets expected.“The language around inflation is strong despite downward revisions.”

The RBA also released its quarterly forecasts which showed core inflation will only hit the midpoint of its 2-3% target band in 2026. The trimmed mean measure, which smooths volatile items, came in at 4.2% in the final three months of 2023.

The extended timeframe for inflation to return to target suggests the RBA will stick to its view that rates need to remain at elevated levels for some time, according to money markets and economists. That suggests Australia may be one of the last dollar-bloc economies to begin easing, they said.

Underlining that, rates traders expect the RBA to hold off policy easing until later in the year, while they are certain the Fed will begin cuts by June. Australia’s central bank is seen as likely to undertake two quarter-point reductions this year, while the Fed is seen delivering as many as five.

“Maintaining a tightening bias signals to the fiscal authorities that it’s too early to declare the inflation fight over,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “The RBA would not wish to see fiscal settings loosened until further progress on inflation has been made towards the target band.”

Reinforcing that theme, Bullock noted in her press conference that Australian governments are “keenly aware” of inflation risks.

Fed Chair Jerome Powell said Americans may have to wait beyond March for the central bank to cut rates as officials look for more economic data to confirm that inflation is headed down to 2%. In an interview with CBS’s 60 Minutes that aired Sunday evening, Powell said the “danger of moving too soon is that the job’s not quite done.”

Bullock did not provide a timeline on the RBA’s next moves in either direction, saying optionality on rates is needed as the board remains squarely data-dependent.

The RBA moved cautiously during its tightening campaign — its 4.25 percentage points of hikes was 1 point less than the US and New Zealand delivered. Another reason for expectations the RBA will be slower on the way down is the disinflation impulse so far in Australia is weaker than elsewhere, with productivity growth among the weakest in the developed world.

At the same time, Australia’s labor market remains solid and the economy has shown resilience to higher borrowing costs, suggesting there’s no urgency to shift quickly to easing. Moreover, policymakers won’t want to further fuel house prices that have been driven up by a supply shortage and high immigration.

“We do not expect any further rate increases by the RBA this cycle,” said Luci Ellis, chief economist at Westpac Banking Corp. and a former RBA official. “Rate cuts are still some way off, though. The RBA board will need to be sufficiently comfortable that inflation will definitely decline into the 2–3% target band.”