VIEW: Westpac: Pricing Continues To Deviate From RBA Messaging

Westpac note that "a month ago, Dr Lowe gave a speech to the National Press Club in which he articulated a clear, consistent and confident message around the RBA's policy approach. Subsequent communication has not deviated from the central tenets of the message including the evolution in the central bank's reaction function from a pre-emptive approach to a reactive one. That is consistent with a number of global central banks as well, including the Fed. Dr Lowe's other message was that "…market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share." Some of this pricing has been pared back, but not a lot. And that is also reflected in forward 3-Year swap rates. While we completely concur with the market's recent re-calibration of inflation risks, we think that the market is being too pre-emptive relative to the central bank's policy stance. We also concede that this curve shape is unlikely to shift anytime soon, as global growth optimism remains strong. What this pricing does suggest, however, is that valuations further along the curve have probably shifted enough for now."