UBS: Brace for interest rates cuts

Via the UBS rates team today:

The RBA Sentiment Index – our proprietary tracker for hawkishness/dovishness in the RBA minutes – shows that the bank’s tone turned more dovish at its meeting in November. Notably, the index has turned negative for the first time since September 2016, when Dr Lowe became Governor. This has been driven by a deterioration in the index on the ‘domestic economy’ (Figure 2); as the more cautious tone around housing continues to pull this index lower. The characterisation of ‘inflation’ was also a touch less positive (Figure 3); while the RBA’s rhetoric on the ‘global outlook’ was unchanged, stuck in negative territory (Figure 4).

The recent move in the RBA Sentiment Index suggests that, going forward, the Bank is likely to update its communication toward a ‘neutral’ bias. Market’s pricing for the RBA has already largely taken this into account (also, on the back of weaker-than-expected Q3 GDP data). However, we see risks as asymmetric heading into the labour force report this week. A better-than-expected employment number is unlikely to trigger a more hawkish repricing of the RBA – given the shift in the tone will continue to weigh on expectations. However, any miss (especially on the unemployment rate) would entrench the current, dovish market’s pricing, in our view. On the back of that, we may see some more bps of cuts priced in for next year. This clearly poses risks to our view that the front end of the curve is not steep enough.

I think we can see in today’s criminal panic that the RBA may move earlier than I thought. It will not wait on ceremony for the election to pass.