Market pricing for RBA rate hikes has moved significantly over the last six months. Last September, financial markets were predicting nearly two RBA rate hikes by the end of 2018. Now markets have pushed these back to 2019 with only a 40% chance of a move before the end of 2018. The first rate hike is not fully priced in until mid-year and the second not until the second half of the year.
Economists’ forecasts have also been shifting. Thirteen bank economists contribute to the Bloomberg monetary policy survey. Last September seven expected a rate hike by the third quarter of 2018 and six expected rates to be on hold.
The latest Bloomberg survey has only one of the 13 economists expecting a hike by the third quarter of this year but eight others are anticipating a move by the first quarter of 2019. Only four expect rates to be on hold till mid-2019.
The only caveat at the moment is the recent rise in BBSW (refer last week’s commentary) and the flow-on effect via increased wholesale funding costs for the banks. If this elevated BBSW persists, we may see banks forced to move lending rates (out of cycle) to compensate for their increased funding costs.
Global short-term funding costs vs Overnight Index Swap rate (OIS)
Equity markets will return after the Easter break trading in risk-off mode. The catalyst being the announcement on Sunday from the Chinese Ministry of Finance that it is increasing tariffs on up to $3bn of US imports including higher tariffs on frozen pork, wine, aluminium scrap, and certain fruits and nuts, in response to the US tariffs on steel and aluminium.
US equities went into meltdown, assisted by a 5% fall in Amazon shares after Donald Trump tweeted that the US postal service is losing money from Amazon deliveries which need to be corrected. The Dow was down over 2% on Monday night which sets the tone for a weak start on our local share market this morning.