Westpac: Has RBA Terminal Rate Pricing Peaked?

Westpac note that “with such a significant forward cash profile already factored-in for 2022 and beyond for both the Fed and RBA, it is perhaps only natural that markets will periodically re-assess the balance of trade-offs between ongoing inflation, front-loaded policy tightening and risks to the forward growth profile. The interplay of these trade-offs is contributing to volatility across the curve, including the continuing focus on what the Fed and RBA terminal rates might be. Indeed, for the first time in a number of weeks, the market has taken some RBA rate hike premium out of forward curves and lowered the terminal rate by around 25bp. That was in line with Fed pricing moves and given how hawkish the latter has been, which will likely be reiterated this week with Powell appearing with a raft of other speakers, the market will likely have a similar thematic this week. Domestically, however we have both the quarterly WPI and the key monthly labour report to provide more idiosyncratic price action. In our view, with the RBA having shifted toward business liaison and other measures of labour cost, the unemployment rate will probably have more of an influence on pricing. With the near-term RBA monthly calendar pricing in the 10-to-mid 30s, the risk is that a very strong result factors in more front loading rather than a softer result shifting pricing too far in the other direction. Looking further out along the curve, we have assessed the evolution in the 12-month forward cash pricing during the last tightening cycle. It tended to trade in a +50bp to -50bp range relative to where it was on the day of the first hike. We expect similar price action to evolve in coming weeks.”