🏦 Westpac Review On RBA

• Going into today's RBA policy meeting, consensus was that the RBA would defer its recent decision to "continue purchasing government bonds after the completion of the current bond purchase program in early September... at the rate of $4 billion a week until at least mid November". Westpac's forecast was that the RBA would actually increase purchases to A$6bn through to November.

• Heading into the announcement the 3yr futures were flat up 0.5 ticks, while 10yr prices were up 5 ticks from yesterday’s close, reflecting both the overnight global bull flattening impulse and also the growing consensus that the RBA would reverse is prior undertaking to taper its weekly purchases in September or even increase them. By declining to do either, the RBA struck a more hawkish stance than was expected, with 10yr futures giving up 4 ticks immediately following the announcement.

• The RBA’s comment that, despite a negative GDP expectation for the September quarter, “the experience to date has been that once virus outbreaks are contained, the economy bounces back quickly" is strong message to the market about their assessment of the current risks to growth and should keep forward cash rate pricing relatively unchanged. During the rally over the past month, the market has removed around 50bp of hikes out in the 2024 year (from 1.25% to 0.75%), and maybe pushed the start date out a quarter or so to early 2023.

• That is unlikely to change for now, however the RBA’s confidence will certainly skew the market response function to any improved data in coming months toward bearish outcomes. Looking near term, however, when the data will remain mixed and sentiment held hostage to daily case counts in NSW in particular, we would not expect much of a shift in current pricing.

• We expect yields to remain low and rangebound. While we would still continue to fade AU-US 10yr spread widening impulses, we think the entry point has now ratcheted back up to +10bps (from 0bps).