Via Bloomie:
The spread between Australian and U.S. bond yields has reached its most extreme and will narrow again as Aussie wages and inflation spur an earlier start to monetary tightening Down Under than most anticipate, according to Bank of America Merrill Lynch.
…Morriss’s expectation for Australia’s official cash rate to be increased in the final quarter of this year and twice next year is a more aggressive path than what the swaps market is anticipating. Traders are pricing in just a 31 percent chance of a rate hike by December.
“If banks pass this on more than five to 10 basis points that might be material,” he said. But “if wages rise and inflation rises in Australia, they’re going to have to react to that regardless of what happens to funding markets,” he predicted. By waiting to act only after pay packets and consumer prices accelerate, “there’s a risk that they might have to do more later” with monetary tightening, he said of the RBA.
I’d call that delusional as house prices fall, the terms of trade fall, wages refuse to budge and the construction pipeline empties but that’s what makes a market.
