Goldman Sachs: Mark-To-Market

Goldman Sachs note that “the RBA will meet this week against a backdrop of stronger-than-expected data and significantly more hawkish market pricing of policy rate expectations since the last meeting. Most recently, the 2022-2023 Commonwealth Budget was largely in line with our economists’ expectations, but on the margin delivered more measures to mitigate recent increases in the cost of living for Australian households, adding further support to the near-term growth outlook. Our economists view this marginally raising the odds of a more hawkish RBA policy path, but they don’t expect the RBA will pivot to a more hawkish outlook until it receives more data on inflation and wages over H122. While front end re-pricing could be vulnerable to the RBA slow-walking policy normalisation, we think the upshift in longer maturity yields will prove durable even in such a scenario, and therefore revise our 10-Year AUD yield higher - now projecting YE22 levels at 3.10%. This change aligns our AUD yield forecasts more closely with yields in other regions; although we expect a comparatively less aggressive policy tightening path in Australia, mounting global inflationary pressures will likely keep risk premia entrenched at longer maturities.”