TD Securities: Pay RBA May '24 OIS

TD Securities write “there has been no RBA communication to kick-start the new year, but there have been a slew of ECB and Fed speakers attempting to curb the market's enthusiasm on the speed and magnitude of rate cuts priced in.”

• “We see no fundamental reason for the market to price in or deliver more than what is priced for the Fed through May.”
• “November’s Australian monthly CPI showed price pressures are easing and Q423 CPI should print below the RBA's Nov SoMP forecasts of 4.5% Y/Y for both headline and underlying inflation.”
• “However, we doubt the RBA will be convinced that annual underlying inflation is set to enter the 2-3% target this year and remain there in 2025 by its May meeting, particularly with scheduled tax cuts to commence in Jul '24, possible cost of living relief before the May '24 Budget and no evident improvements in productivity. We have the first RBA cut pencilled in for Aug.”
• “A paring back of offshore rate cut expectations should push outright RBA OIS levels higher and the curve steeper.”
• As such, they recommend paying May ’24 RBA-dated OIS at 4.25%, targeting a move to 4.32%, with a stop set 4.20%.