US TSYS: Rally Extends As Risk-Off Remains

ACGBs (YM -6.0 & XM -10.0) are sharply cheaper but off Sydney session cheaps.

• Q4 GDP printed exactly in line with consensus at +0.6% q/q & 1.3% y/y up from 0.3% & 0.8% in Q3.
• Cash US tsys have twist-steepened, with yields 2bps lower to 2bps higher, in today’s Asia-Pac session after yesterday’s heavy session.
• Trump, in his address to Congress, praised the drop in interest rates and pledged to balance the federal budget. He urged Congress to pass tax cuts and mentioned discussions with major US car companies. He reiterated his stance on tariffs, stating that products not made in the US will face tariffs, in some cases “rather large ones.”
• Cash ACGBs are 6-10bps cheaper with the AU-US 10-year yield differential at +11bps.
• Swap rates are 5-8bps higher, with the 3s10s curve steeper.
• The bills strip has bear-steepened, with pricing -1 to -7.
• RBA-dated OIS pricing is 1-5bps firmer across meetings today. A 25bp rate cut in April is given an 11% probability, with a cumulative 59 bps of easing priced by year-end.
• Tomorrow, the local calendar will see Building Approvals, Private Sector Houses and Trade Balance data.
• The AOFM plans to sell A$700mn of the 1.00% 21 December 2030 bond on Friday.

US President Trump has confirmed that 25% tariffs on aluminium, copper and steel as well reciprocal tariffs will be implemented in his speech to Congress. Aussie is highly sensitive to risk and global growth, which is assumed to be hit by increased protectionism. AUDUSD has declined sharply today and is currently down 0.4% to 0.6250 with the USD index off its highs to be little changed. The pair is holding above initial support at 0.6187 reaching a low of 0.6234.

• Aussie is weaker against most major currencies. AUDJPY is 0.3% lower at 93.69 off the intraday low of 93.34. While AUDNZD is slightly down to 1.1067 as kiwi is also risk sensitive. AUDEUR continues to decline and is -0.3% to 0.5887 and AUDGBP -0.3% to 0.4889.
• Australia’s Q4 GDP printed in line with expectations at 0.6% q/q and 1.3% y/y signalling the start of a tentative recovery. Productivity fell for the third straight quarter which is likely to continue to concern the RBA.
• Equities are mixed though with the ASX down 0.9% but CSI 300 +0.3%, Hang Seng up 1.6% and S&P e-mini +0.5%. Oil prices have continued falling with WTI -0.9% to $67.67/bbl. Copper is up 1.4% while iron ore is approaching $101/t.
• Later US February ADP employment, services ISM/PMIs, final January orders and the Fed’s Beige book are released. European February services/composite PMIs and Q4 Italian GDP (2nd estimate) also print. 

Q4 productivity growth was not as bad as the RBA was expecting but it still fell for the third consecutive quarter to be down 1.2% y/y, a deterioration from Q3’s -0.6% y/y. Today RBA Deputy Governor Hauser identified productivity growth as the key issue. Monetary policy cannot do anything about it and can only react to it. He also said it may be the reason why wage growth is slowing despite the strong labour market. 

• The RBA forecast productivity to fall 1.9% y/y in Q4 and it has it improving to+0.7% y/y in Q4 2025 and reaching its historical average in H1 2026, but it has consistently revised down its expectations. While it is a long-term concept, its weak performance could result in less monetary easing.
• Hours worked continued to outpace GDP growth rising 0.7% q/q in Q4, the fourth consecutive rise. In 2024, they were 1% above 2023 resulting in no improvement in productivity over the year.
• With productivity growth falling 1.2% y/y in Q4, then wage growth consistent with inflation at the RBA’s band mid-point of 2.5% is only 1.3% compared with Q4’s WPI at 3.2% y/y, assuming productivity continues to contract at around the same rate as the end of 2024.
• Unit labour costs (ULC) rose 1.6% q/q to be up 4.7% y/y tentatively implying that the moderation in ULC’s has stalled as the recent trough was 4.5% in Q3. ULC growth eased to 5.1% in 2024 from 6.6% but remains well above the 2.8% series average.

Australia productivity vs ULC y/y%