RBA Tightening Premium Reduced Further

RBA tightening premium continues to be pulled out of the market, with recession-related worry in the U.S., spill over from the post-FOMC reaction in market pricing re: the U.S. Federal Reserve, a miss in domestic Q2 headline CPI and questions over the health of the Australian consumer (in lieu of yesterday’s retail sales print) being the key drivers when it comes to this week’s price action.

• Note that most still see a 50bp hike at next week’s RBA decision as a sure thing, although the matters outlined above leaves OIS pricing ~48bp of tightening come the end of next week’s decision (~10bp below pre-CPI levels and nearly 20bp off the mid-July peak) i.e. such an outcome is slightly less than 100% priced.
• December ’22 RBA OIS now stands at 3.03%, over 50bp shy of levels seen towards the backend of last week.
• The terminal rate for the cycle is currently a touch above 3.20% (11bp lower on the day), per OIS pricing, with the OIS strip looking for that level to be hit in Feb ’22.
• The pull lower in OIS will be providing a bid for the front end of the ACGB space.