RBA: Unchanged Rates Resulted In CPI Undershoot, Need More Good Inflation News
Deputy Governor Hauser has just spoken with Bloomberg and confirmed that the Board reached a “clear consensus” to cut rates on Tuesday and one of the main reasons for the move was a scenario where policy was not eased and it resulted in inflation coming in below the band mid-point at 2.5%. Going forward though, he doesn’t share the market’s confidence about rate cuts and that there won’t be one piece of data that will trigger the next move. The RBA continues to focus “rigorously on inflation”.
- Hauser reiterated that the rate path currently priced in by markets resulted in underlying inflation staying above 2.5% but the central bank could be “wrong” and if it is then the Board will respond, but market pricing is currently not its central case. But contained inflation is not a “done deal yet” and more good news on this front is needed.
- He said that today’s January labour market data was “incredibly strong” and more data is needed to understand if there is spare capacity.
- The RBA is “sure” that its policy is still restrictive but with estimates of the neutral rate ranging from 1% to 4%, it is too “vague” to be useful and little weight is put on those approximations.
- There are so many unknowns that tariff scenario analysis results in a huge range of outcomes and the RBA is waiting to see how trade policy develops. But the uncertainty is a problem, as it is likely to delay economic decisions which could way on growth. Hauser pointed out thought that historically Australia has been flexible in adjusting to changing global conditions.
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ASIA STOCKS: Asian Equities Fluctuate On Trump Tariff Headlines
Asian markets experienced significant fluctuations Tuesday following U.S. President Donald Trump's warnings of 25% tariffs on Canada and Mexico by February 1, which dented earlier optimism about a gradual trade policy approach. South Korean stocks turned lower as Trump ordered a review of global trade practices, with battery and chemical shares plunging, though chipmakers saw gains. In China, markets briefly pared gains before recovering, supported by hopes that China may avoid immediate tariff measures, although the offshore yuan weakened.
- South Korean stocks fell after initially opening higher, with the KOSPI losing 0.37% by late morning as Trump’s trade policy review rattled sentiment. Battery and chemical shares were among the biggest losers, with LG Energy Solution dropping 5.4% and POSCO Future M plunging 10%. However, chipmakers like SK hynix and Hanmi Semiconductor gained 1.4% and 2.22%, respectively, helping limit broader losses.
- Taiwans TAIEX is little changed today, as TSMC and Hon Hai trades unchanged to 0.20% higher.
- Japanese equities erased early gains as Trump’s tariff threats on Canada and Mexico dashed hopes for a moderate trade policy. Benchmark indices the TOPIX & Nikkei are now trading mixed although wrapped around unchanged for the day. Export-reliant carmakers were among the hardest hit, with Mazda Motor dropping 2.6%, as investors priced in potential risks to U.S.-bound exports.
- Australian equities saw swings with the wider market however are trading 0.50% higher now, led by gains in Financials.
- Trump’s tariff threats on Canada and Mexico weighed heavily on Asian sentiment. The Canadian dollar and Mexican peso tumbled as much as 1.4% and 0.9%, respectively, dragging down global risk appetite and reinforcing concerns about escalating trade tensions.
AUSSIE BONDS: Richer With Trump Tariff Generated Volatility
ACGBs (YM +5.0 & XM +5.5) are stronger and close to Sydney session highs.
- Cash US tsys are 6-9bps richer in today’s Asia-Pacific session, with a flattening bias, following yesterday’s holiday. The session has been marked by volatility, driven by reports that Trump suggested tariffs on Canada and Mexico might take effect on February 1. While gains were briefly pared, US tsys have since rebounded, trading near session bests.
- The local calendar is light this week after key December labour market data last Thursday. The highlights are the Westpac Leading Index tomorrow and S&P Global PMIs (P) on Friday. The focus is now on Q4 CPI data released on Wednesday, January 29.
- Cash ACGBs are 5-6bps richer with the AU-US 10-year yield differential at -13bps.
- Swap rates are 4bps lower.
- The bills strip has bull-flattened, with pricing flat to +4.
- RBA-dated OIS pricing is flat to 4bps softer across meetings today. A 25bp rate cut is more than fully priced for April (106%), with the probability of a February cut at 68% (based on an effective cash rate of 4.34%).
- The AOFM plans to sell A$800mn of the 2.75% 21 June 2035 bond tomorrow and A$700mn of the 1.50% 21 June 2031 bond on Friday.
