Twist Steepening Post-Lowe Pushback

Governor Lowe’s address was at the fore, as he expressed doubt that the Bank would deliver the degree of tightening priced into the STIR space through year end, while explicitly flagging his preference for a discussion of a 25 or 50bp hike in July (the same discussion took place at the Bank’s June meeting). This saw STIR markets unwind a modest some of the tightening that was priced into the space, with a 47bp of tightening now priced into the IB strip when it comes to the July meeting (vs. ~57bp of tightening that was priced earlier in the day). Further out, there is a cumulative ~280bp of tightening priced into IBs through the Bank’s December meeting (vs. ~300bp earlier in the session). Note that Lowe conceded that markets have been a better predictor of the cash rate than the Bank in recent times, while he also tipped his hat to the Bank’s new expectation of 7% inflation in Q422 (a level he had alluded to in a previous address). The bid in the short end allowed ACGBs to move away from worst levels of the day, with the front end leading the bid. That leaves YM +2.5 & XM -2.0, with the cash curve pivoting around the 5- to 6-Year zone. !0s represent the weakest point on the curve.

• Elsewhere, the Bank noted that it would probably prefer to deploy broader bond purchases as opposed to yield targeting if it had the need to do so in the future, with its review of the latter mechanism conceding that the market’s challenge and eventual breaking of the tool resulted in some reputational damage for the RBA.
• Note that ACGBs initially softened in early Sydney dealing, extending on the overnight weakness as markets set up for the deluge of RBA communique.
• Tomorrow’s local docket will be headlined by the latest Westpac leading index print and A$1.0bn of ACGB Apr-25 supply.