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RBA-dated OIS pricing is steady to 4bps firmer across contracts, led by May 2025. 

• A 25bp rate cut is now slightly less than fully priced by April (98%), with the probability of a February cut standing at 57%.
• For context, 32bps of easing was priced in for April just a week ago.

Figure 1: RBA-Dated OIS – Today Vs. Yesterday

Source: MNI – Market News / Bloomberg

In post-Tokyo trade, JGB futures are weaker, -22 compared to settlement levels, after a data-induced heavy session for US tsys.

• US tsys drifted sideways for most of the session after establishing cheaps after the morning's data: The JOLTS report saw surprisingly elevated job openings in November, but the quits rate reversed a surprise increase from October. Job openings were 8090k (cons 7740k) in November after an upward revised 7,839k (initial 7,744k) in October.
• Headline ISM strengthened to 54.1, a little higher than the 53.5 expected (52.1 prior), with New Orders (54.2, 53.7 prior) and Employment (51.4, 51.5 prior) exactly matching survey expectations. But Prices Paid soared to 64.4 (57.5 expected, 58.2 prior), jumping by the most since January to the highest level in 22 months.
• Holdings data from the BoJ show it sold ¥253.5 billion ($1.6 billion) worth of futures-linked government bonds to financial companies to ease the securities’ shortage in the market. The BOJ held ¥8.0746 trillion of notes due in September 2032 as of Dec. 30, down from ¥8.3281 trillion on Dec. 20, according to the data released late Tuesday. (per BBG)
• Today, the local calendar will see the Consumer Confidence Index alongside BoJ Rinban Operations covering 1-25-year JGBs. Tomorrow we have Nov labour cash earnings figures.

Q4 CoreLogic home values were flat on the quarter to be up 5.3% y/y down from +1.3% q/q and 7.6% y/y in Q3. The capital city index fell in each of the three months in the final quarter driven by weakness only in Sydney and Melbourne. This levelling out in house prices, rising disposable income and stable mortgage rates have helped housing affordability to stabilise but at a particularly unfavourable level.

• Mortgage rates are likely to fall during 2025 but the timing remains unclear. The OIS market has a full 25bp by the April 1 RBA decision and close to 3 cuts by year end. But the RBA remains highly data dependent and while it is becoming more confident that inflation is sustainably returning to the band, there is still further to go.
• Flat Q4 house prices helped affordability to stabilise at 43% below trend but at this stage it is difficult to see a meaningful fall in dwelling prices which is needed to boost affordability but this hides state-based differences. In contrast, affordability is improving in NZ with falling rates and house prices.

Australia housing affordability vs valuation % deviation from trend

Source: MNI - Market News/Refinitiv

• Working age population growth moderated to 2.4% y/y in November from 3% a year ago, but it continues to grow by 40-50k/month ensuring continued robust housing demand. While supply remains constrained with only a tentative recovery in building approvals.
• Housing remains overvalued based on the house price to rents ratio but it has become less so over the last year. Our housing valuation index was 7.6% above trend in Q4, assuming Q4 CPI rents at 6.5% y/y, compared to 10.6% in Q4 2023 and a peak of 24.2% during Covid.
• The Westpac/MI “time to buy a home” index picked up in Q4 but remains at depressed levels due to high house prices and mortgage rates. But December house price expectations fell 5.3% m/m and 9.7% y/y to the lowest level since April 2023.  

Australia Westpac/MI "time to buy a home" nsa