AUSTRALIA: Function Signals Stable Rates On Persistent Positive Inflation Gap
The RBA cut rates 25bp to 4.10% at its February 18 meeting as the Q4 CPI data suggested that “inflationary pressures are easing a little more quickly” than it expected. It also updated its forecasts and extended them to Q2 2027. While Q2 2025 trimmed mean inflation was revised down 0.3pp to 2.7%, the rest of the forecast horizon had it stuck at this rate and no longer reaching the band mid-point. Our policy reaction function uses the 2.5% mid-point and the RBA’s projections to calculate the core inflation gap and as a result, it is not suggesting any further rate cuts, in line with “the Board remains cautious on prospects for further policy easing”.
- The equation uses the one quarter lead of the inflation gap using trimmed mean inflation.
- It also includes the contemporaneous output gap calculated with the RBA’s GDP forecasts, which were revised lower this month, and an estimated trend growth rate of 2.2%. This results in a negative output gap for around two years with it trending towards neutral over 2026. However, this is not enough to offset the positive inflation gap and signal further cuts.
- Thus the policy function has rates stable around 4.1% over 2025 resulting in Q4 2025 around 60bp higher than current AUD OIS market pricing.
- It is worth noting that econometric calculations are just estimates and not projections.
Australia policy reaction function with trimmed mean inflation %
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BONDS: NZGBS: Richer With US Tsys, Trump Tariffs In Focus
NZGBs closed 2bps richer, aligning with strengthening in cash US tsys in today’s Asia-Pac session.
- Cash US tsys are dealing 1-4bps richer in today’s Asia-Pac session, with a flattening bias, after finishing Friday mildly stronger.
- US stock futures are dealing lower ahead of key earnings week, with the S&P 500 down 0.8% and the Nasdaq down ~0.50%.
- “In a social media post on Sunday, Trump said he ordered an emergency 25% tariff on all Colombian goods coming into the US, which will be raised to 50% in a week. Oil, gold, coffee and flowers top the list of exports, according to Colombia’s tax authorities.” (per BBG)
- The US Treasury will auction $69 billion of two-year notes and $70 billion of five-year debt later Monday.
- Focus this week is the FOMC policy announcement on Wednesday.
- Swap rates closed 2bps lower after a subdued session given Auckland Anniversary and Australia Day holidays.
- RBNZ dated OIS pricing closed little changed. 47bps of easing is priced for February, with a cumulative 109bps by November 2025.
- Tomorrow, the local calendar will see Filled Jobs.
- On Thursday, the NZ Treasury plans to sell NZ$200mn of the 1.50% May-31 bond, NZ$200mn of the 4.25% May-36 bond and NZ$100mn of the 1.75% May-41 bond.
CHINA: Futures Jump as Industrial Profit Decline Continues. (Corrected)
{CH} China:
• The PBOC conducted its daily OMO this morning injecting CNY175bn ahead of the Lunar New Year break, just as China data showed that decline in Industrial Profits is now into it’s third year with a decline of -3.3% for December.
• The benchmark 10YR future jumped +0.365 in this morning’s trade to be at 109.405.
• Having edged towards the 20-day EMA last week, today’s moves sees the contract break out above all major technical levels with key levels being 20-day EMA 109.05, 50-day EMA 108.40, 100-day EMA 107.55 and 200-day EMA 106.60.
• China’s 5YR future jumped +0.295 and the 2YR future jumped +0.142.
• The Lunar New Year holidays sees China out Jan 28-Feb 04 inclusive and it is likely that the Central Bank will provide liquidity leading into the holiday period which could see the resumption of the upward trend.
CHINA: Futures Jump as Industrial Profit Decline Continues.
- The PBOC conducted its daily OMO this morning injecting CNY175bn ahead of the Lunar New Year break, just as China data showed that decline in Industrial Profits is now into it’s third year with a decline of -3.3% for December.
- The benchmark 10YR future jumped +0.365 in this morning’s trade to be at 109.405.
- Having edged towards the 20-day EMA last week, today’s moves sees the contract break out above all major technical levels with key levels being 20-day EMA 109.05, 50-day EMA 108.40, 100-day EMA 107.55 and 200-day EMA 106.60.
- China’s 5YR future jumped +0.295 and the 2YR future jumped +0.142.
- The Lunar New Year holidays sees China out Jan 28-Feb 04 inclusive and it is likely that the Central Bank will provide liquidity leading into the holiday period which could see the resumption of the upward trend.
- Key data out next week: Industrial Profits Jan 27, PMI’s 27 Jan.
