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Goldman Sachs On Aus Rates

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The US Bank views the surprise inflation increase in Australia reducing the likelihood of monetary easing, with expectations now shifted towards a delayed rate cut in November, driven by stronger-than-expected inflation figures for the first quarter and March, despite government-linked factors.


"Inflation surprise lowers odds of easing in Australia. Wednesday’s inflation print surprised to the upside both for 1Q24 and March in Australia. Both headline and trimmed-mean inflation surprised +20bp to the upside relative to consensus expectations, and core inflation for March accelerated to above 4%yoy. While the upside surprise was partly attributable to government-linked items (market services inflation softer at +0.7%qoq) and should not derail the broad disinflation story, the beat was nonetheless sufficiently large to delay the prospect of RBA cuts later this year. Our economists now expect the first cut in November, while the market is now pricing ~10bp hike premium for this year and 31bp of cuts for next. Despite this repricing, we maintain our recommendation to receive 1y1y vs 1y AUD OIS, for two key reasons. First, against a backdrop of subdued growth (especially on a per-capita basis), further deterioration in the labor market could prompt a dovish pivot from the RBA and faster cuts being priced so long as the broad disinflation picture remains intact (which we continue to expect). Second, although not our base case, if the right tail outcome (further hikes) is realized due to sticky inflation, the curve could flatten given the already-soft growth backdrop—akin to the experience in late 2022 when a hawkish RBA exacerbated recession concerns. The key risks to our trade are 1) a scenario where shallow insurance cuts prompt signs of reacceleration that forces the RBA to reverse course shortly after, or 2) a sell-off in global duration."

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The US Bank views the surprise inflation increase in Australia reducing the likelihood of monetary easing, with expectations now shifted towards a delayed rate cut in November, driven by stronger-than-expected inflation figures for the first quarter and March, despite government-linked factors.


"Inflation surprise lowers odds of easing in Australia. Wednesday’s inflation print surprised to the upside both for 1Q24 and March in Australia. Both headline and trimmed-mean inflation surprised +20bp to the upside relative to consensus expectations, and core inflation for March accelerated to above 4%yoy. While the upside surprise was partly attributable to government-linked items (market services inflation softer at +0.7%qoq) and should not derail the broad disinflation story, the beat was nonetheless sufficiently large to delay the prospect of RBA cuts later this year. Our economists now expect the first cut in November, while the market is now pricing ~10bp hike premium for this year and 31bp of cuts for next. Despite this repricing, we maintain our recommendation to receive 1y1y vs 1y AUD OIS, for two key reasons. First, against a backdrop of subdued growth (especially on a per-capita basis), further deterioration in the labor market could prompt a dovish pivot from the RBA and faster cuts being priced so long as the broad disinflation picture remains intact (which we continue to expect). Second, although not our base case, if the right tail outcome (further hikes) is realized due to sticky inflation, the curve could flatten given the already-soft growth backdrop—akin to the experience in late 2022 when a hawkish RBA exacerbated recession concerns. The key risks to our trade are 1) a scenario where shallow insurance cuts prompt signs of reacceleration that forces the RBA to reverse course shortly after, or 2) a sell-off in global duration."