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The battle between market expectations and RBA guidance

Chris Weston
Head of Research
1 Nov 2021
The battle between the market expectations and the RBA guidance is still one of the debates in global macro.

It’s a huge week ahead and the markets come alive once more with the sound of event risk and opportunity. The incredible repricing of rate expectations had everyone focused on short-term rates last week and few markets were as wild as the Aussie front-end – the AUD proving to be the best-performing G10 currency as an additional 57bp – or just over 2 hikes – were priced into AU 2-year swaps.

US real rates were all over the shop on Friday, with 10yr real rates trading a monster -103bp to -89bp range, and while closing at the lows of the day, discretionary gold traders would have noticed this, notably as the yellow metal failed to reclaim the $1800 – a 0.8% move higher in the USD was clearly a headwind to gold even if real rates ultimately moved lower – maybe there was month-end flow or portfolio tweaks ahead of this week’s FOMC meeting and non-farms, but the USD was strongly bid on Friday and we’ll see if that has follow-through today.

Equities were up smalls on Friday, but with US earnings essentially in the rear-view mirror now it's all about the macro from here. Having been bullish on equities it feels right to turn more a touch more cautious this week. Although, the fact that equities have held up so well considering the rapid re-pricing of interest rates is certainly a positive. Had you told me the 2-year US Treasury was headed to 50bp when yields were 20bp in late September and the S&P500 would be above 4600, I’d certainly been quite staggered.

Still, a market at all-time highs is as bullish as it comes and a ramp-up of corporate buybacks will help underpin prices, even if the technicians would drill down and suggest the internals are not that hot – 65% of companies are above its 20-day MA, 71% above the 200-day MA and only 21% are making new 4-week highs.

OPEC meeting

Commodities should be well traded this week, with crude the real drawcard. The OPEC meeting on Thursday shouldn’t surprise too intently with the firm consensus that the group stick to its planned output increase of 400k barrels. The signs from Iraq, Saudi and Iraq are that this will be the case, but with China, the US and India putting pressure on OPEC to increase supply, any signs of raising production in 2022 could weigh on crude. The preference is to buy strength here, and a close through $84.50 would raise the risk of bull trending conditions again.

What else is on the radar?

RBA meeting (Tuesday 14:030 aedt) – The market firmly expects the RBA to lose its yield curve control policy – it’s time for bond markets to have a greater control its own destiny here. We should get upgraded inflation and employment guidance and there is a chance the guidance for hiking in 2024 will change to 2023. However, as RBA gov Lowe has stated it’s the “data, not the date” that is important.

There is a strong chance the statement attempts to push back on rate hikes which have gone so hard – effectively pricing the first hike by May 2022 and two hikes by July. AU 2-year swaps are trading a 66bp premium over US 2-year swaps, which is clearly overdone. Can the RBA push back enough to cause a less dysfunctional market? Will the market even buy the pushback? Watch AUD and AUS200 exposures over the meeting as it could get a little volatile.

FOMC meeting (Thursday 04:00 aedt) – It would be an incredible shock if the Fed didn’t formally announce it was starting to taper the pace of QE by $15b – A symbolic event, but unlikely to move markets. With 20bp of hikes (nearly 1 hike) priced into rates markets by June and a little less than 3 hikes by the end-2022, Jay Powell may need to stress the sequencing of events in its plans to normalize policy – this will involve the idea that rate hikes are not currently being discussed by the committee. Whether we see 2 and 5-year Treasury yields move lower after the FOMC is yet to be seen, but if Powell maintains a ‘transitory’ view on inflation and justifies the logic, it could promote buying in short-end rates and see the USD fall modestly.

For anyone keen to express a view on short, dated US bonds, put the SHY ETF (iShares 1-3 Year Treasury Bond ETF – traded on MT5) on the radar.

US non-farm payrolls (Friday 23:30aedt) – after two months of worse-than-expected payrolls reports the market expects around 450k jobs to have been created in October – the economist’s range is 700k to 250k. Watch average hourly earnings, which are expected to increase from 4.6% to 4.9%, and again this could be the backbone for higher inflation expectations, which feed into rates pricing. The participation rate is eyed at 61.8% but even though that is expected to rise 20bp the unemployment rate is expected to drop a touch to 4.7%. It’s hard to make a play on payrolls, but if wages are above 5% then I’d argue the USD should work well vs the EUR, JPY, and CHF.

ISM manufacturing and services will also be keenly watched this week.

BoE meeting (Thursday 23:00 aedt) – The market is discounting 13bp of hikes, so a token 15bp hike shouldn’t move the dial on the GBP too intently. We’re still in the dark on opinions from BoE members Jon Cunliffe and Ben Broadbent, so there is a risk they leave policy unchanged, subsequently guiding to a hike in December – in fact, of 44 economists polled by Bloomberg 23 are calling for no change.

The guidance on whether more hikes are to come is obviously key and many expect another hike in February. However, like the RBA and Fed, the BoE will want to push back on market pricing. GBPUSD is trading heavy into the week's event risk and the bias is for a move into 1.3600. EURGBP is less clear, but a range of 0.480 to 0.8420 is in play and may well respect those levels.

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