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  • 🔔 RBA Going Slow, BoC About To Go Fast & ETF Optionality

🔔 RBA Going Slow, BoC About To Go Fast & ETF Optionality

Shout out to Macrodesiac partner Syscoin 👇

RBA Finally Lost Patience

The Australian Central Bank kept the cash rate on hold today, but dropped the promise to remain 'patient' on policy changes.

The Aussie took the opportunity to push right on through the 0.76 handle 👇

Why wait?

Well, unlike other developed economies, Australian inflation isn't above the 2-3% target band target yet. The RBA's preferred measure is the annual trimmed mean gauge, which hit 2.6% in the final quarter of 2021.  

The RBA has tried to drag out the hiking decision for as long as possible, with the hope that this cycle could reverse a decade-long trend of sluggish wage growth.

The takeaway quote from Governor Lowe was as dry as ever 👇

"Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs,"

The next meeting (May 3rd) will see things start to get interesting. The March labour force report is out on April 14th & quarterly CPI data will be released on the 27th April.

There's no doubt that the labour market is strong, and CPI is expected to come in above 3% this quarter.

  • Will it be enough to hike at the May meeting?

  • Or will the RBA wait to see the quarterly wage price index on the 18th of May?

Westpac noted a clue in the minutes 👇

In his (Lowe) Statement last month after the March meeting, he did refer to “labour costs” but in the Minutes of the March meeting the Board referred to the need for “aggregate wages growth to be consistent with inflation being sustainably at target.”

For the RBA, 3% annual wage growth is the goal. Westpac think they're unlikely to reach it this quarter (but there's a caveat)...

The Wage Price Index that prints on May 18 is likely to print 2.5% (0.8% for the quarter), well below the 3% target that the Governor has set in the past although the annualised six month pace is likely to be around 3%.

Handy table from @IFM_Economist here tracking the data that the RBA will have to work with at each meeting 👇

Summin up, June looks like the first truly 'live' meeting for the RBA, and losing 'patience' is another step in that direction...

How about the Bank of Canada? 👇

(BBG)

Headline says it all. BoC are about to rock out with their errm... hike 50bps at the next meeting,

Per BBG, investors in overnight swaps are pricing in about an 80% chance of an outsized hike. Another strong jobs report on Friday could push that number closer to 100%.

But the bar for surprises is high. There's a boatload of tightening already priced in 👇

Westpac

The black line is about 12 months from now, and we can see the Fed, BoC, RBA, & RBNZ pricing are all converging by that point.

For some reason the ECB are expected to tighten 100bps within the next 12 months and a further 75bps in the two years after that.

I aksed Michael Jordan his thoughts on that.

Back to Canada. We've spoken a lot with Premium members about the ability of the Canadian economy to prosper under higher rates, as well as the impact on different housing markets.  

For the CAD, rate differentials could be a short-term driver, but presuming the OIS pricing 12 months out is roughly correct (a pretty big assumption I know), those differentials are expected to disappear.

If the BoC goes with a dovish 50bps hike (hike 0.5% then wait and see, rather than hike and commit to a sequence of hikes), then CAD is approaching a decent area to monitor for a reversal.

Not one I'd rush into, but the BoC have been reluctant hikers so far in my view. Likewise, I think CAD strength should fade if the data confirms the recent softening of global demand growth is more than just a blip.

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