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Analysis: RBA pushes back on the extent of yield moves

• We noted in last week’s Weekly that the RBA would need to decide whether to push back on market moves by reiterating current guidance and/or offering to buy more 3yr bonds to anchor yields.
• The RBA came out swinging to defend the 3yr YCC target with $7bn in purchases, as well as pushing back on the extent of the broader move in longer yields yesterday with the RBA doubling the amount of normal QE purchases ($4bn vs. $2bn usually).
• Today’s RBA Statement notes the QE purchases were “brought forward…to assist with the smooth functioning of the market. The Bank is prepared to make further adjustments to its purchase in response to market conditions.” The RBA affirmed its ‘best guess’ guidance of not seeing the conditions for a rate rise in place until at least 2024. No decision has been made on whether to extend the 3yr YCC target to the November 2024 bond with a decision to be made later in the year.
• It is clear the RBA remains committed to not lifting rates until at least 2024. Given the improvement in the economy to date, we do not see the YCC target being extended beyond the current April 2024 bond. QE meanwhile is likely to be extended beyond September by another $100bn with the currency becoming a concern and the US Fed likely continuing their QE program at the current rate until early 2022.
• The RBA’s QE bond buying signal contrasts somewhat with that seen in the US and the UK where many central bankers are taking a more positive view of the signals sent by the bond market, while also reiterating existing policy guidance. With output gaps possibly closing in the US and the UK within 2 years and central banks sanguine on inflation risks, markets are likely to continue to price the risk of inflation picking up.
• The other question markets are asking is how aggressive any tightening cycle will be when it eventually does occur. Former NY Fed President Dudley (on the dovish spectrum in his time on the FOMC) noted recently “a tightening process will probably have to happen quite briskly”, nominating perhaps 200bps a year! (link to speech)

The week ahead

• Australia: Focus now shifts to tomorrow’s Q4 GDP, NAB pencilling in a 2.9% q/q print, above the consensus of 2.3%. Other data include Weekly Payrolls on Wednesday and Trade and Retail on Thursday.
• International: The focus remains on bond and how central banks are interpreting the moves. Note US Fed Chair Powell is speaking on Thursday as is RBNZ Governor Orr. As for data: US: Payrolls on Friday is out after the US Services ISM on Wednesday

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