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Is U.S. STIR Outperformance AU Temporary?

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Last week the messaging from the RBA and the Fed could not have been more divergent with RBA Governor Lowe signalling a willingness to consider a policy pause and Fed Chair Powell canvassing the possibility of larger, faster hikes and a higher terminal rate. A commitment to data dependency was seemingly the only common ground.

  • A week on and the situation couldn’t be more different with the Silicon Valley Bank (SVB) collapse and concerns of financial contagion delivering dramatic outperformance of U.S. STIR versus AU in terms of pricing out of tightening for the next meeting as well as changes to terminal rate expectations (-150bp Vs. -40bp).
  • For Australia (Fig 1), recent events appear to have reinstated a familiar theme for the current tightening cycle, after a temporary departure in February, of the RBA undershooting OIS pricing.

Figure 1: RBA Cash Rate Vs. OIS 6M1M (led 6M)

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Last week the messaging from the RBA and the Fed could not have been more divergent with RBA Governor Lowe signalling a willingness to consider a policy pause and Fed Chair Powell canvassing the possibility of larger, faster hikes and a higher terminal rate. A commitment to data dependency was seemingly the only common ground.

  • A week on and the situation couldn’t be more different with the Silicon Valley Bank (SVB) collapse and concerns of financial contagion delivering dramatic outperformance of U.S. STIR versus AU in terms of pricing out of tightening for the next meeting as well as changes to terminal rate expectations (-150bp Vs. -40bp).
  • For Australia (Fig 1), recent events appear to have reinstated a familiar theme for the current tightening cycle, after a temporary departure in February, of the RBA undershooting OIS pricing.

Figure 1: RBA Cash Rate Vs. OIS 6M1M (led 6M)

Keep reading...Show less