VIEW: TD Sec Stick To Aug Lift Off, Add Sep Hike, 3 Rates Trades Outlined

TD Securities note that “the RBA is presiding over the hottest jobs market in our lifetime with little evidence it's feeding into sustained wages growth or inflation. What a problem to have! The unemployment rate at 4% is at or near NAIRU. This rate will most likely need to move lower for some time to guarantee a sustained recovery in wages and inflation. The market is missing the point that the RBA seems more comfortable with the risk of moving too late than too early. The strip is close to pricing in 6.5 consecutive monthly RBA hikes from the June meeting but the RBA's message has not changed. Too much is priced. The Bank is likely to look past Q1 inflation (in Apr) and Q1 Wages (in May). This rules out a hike as early as June. We maintain our August call for lift off and insert a RBA hike for Sep'22 and lift our terminal target rate forecast for Feb '24 from 1.75% to 2%.”

• Receive Jun RBA 2022 OIS: Enter at 0.34%, target 0.05%, stop at 0.50%. “The Bank is likely to look past Q1 inflation (in Apr) and Q1 Wages (in May). This rules out a hike as early as June.”
• Receive Dec RBA 2022 OIS: Enter at 1.60%, target 0.75%, stop at 1.85%. “Assuming our call for the first RBA hike to 0.25% in Aug '22 is correct, 3 x 25bp hikes & 1 x 50bp hike to year-end would still fall short of Dec '22 pricing.”
• Pay 3-Year A$ BoB spread: Enter at 16.625bp, target 35bp, stop at 10bp. 1bp neg carry per 3 months. “It's unlikely the OIS implied 3% terminal rate is realised. Banks passing on higher funding costs does the heavy lifting for the RBA.”