Westpac: Will The RBA Hike 2, Or 3, Times In A Row?

Westpac note that “RBA Governor Lowe held firm in his hawkish stance last week. That has left the market factoring a full hike in March and a greater than 50% chance of follow ups in both April and May. Beyond that, every meeting is also seen as live through to mid-year.”

• “While more aggressive than our own forecast, we see this as appropriately reflecting the risk rewards embedded in the RBA’s rhetoric and forecasts. Further, we only see an upside skew to risk rewards around this week’s wages report. Even so, despite the hawkish shift in RBA pricing, the terminal rate is currently below the peak seen in October when the RBA had pivoted to its lower 25bp hike track. That is in contrast to Fed pricing, where the terminal rate has reached new cycle highs.”
• “Indeed, this is the first time that market pricing has exceed the Fed’s median expectation for 2023. The combined outcome of these RBA & Fed shifts is that the terminal rate in AU remains around 100bp below the U.S., having been as much as -140bp below at once stage.”
• “Despite this, the AU/U.S. 1y1y swap spread is narrower than where it was the last time the terminal spread was at current levels. That outperformance is in line with similar outperformance across the term structure. The question is whether it reflects medium-term yield enhancement style support, or whether it implies that the market has not fully embraced Lowe’s new-found hawkishness in the same way that they would believe a shift from Powell and other on the FOMC. Probably a bit of both, although we favour the former over the latter.”