Westpac: Front End Re-Pricing Has Further To Run

Westpac note that "while the RBA was able to shift expectations for the timing of the first rate hike and lower the pace of rate hikes factored-in beyond that, the market is still factoring in a far more aggressive tightening cycle than was the case even a month ago. Clearly the market now believes it is a "forecasting game" and will maintain a sizeable probability that the RBA needs to act on a faster timetable than they currently believe. However, Westpac believe that there is very little chance of a hike in '22, and so we expect a gradual repricing over time. So, we will maintain our received Feb '23 OIS position for now. One question is whether central banks have now encouraged calmer conditions as we approach calendar year end. If so, then we would expect carry trades to be supportive of flatter front end curves. That suggests that 1y1y has a bit further to fall. We would target 1.0-1.1%."