BONDS: NZGBS: Lower Yield Trend Persists, 2yr Off 8bps Past Week

Q2 trimmed mean inflation printed at 0.6% q/q and 2.7% y/y after 0.7% & 2.9% in Q1. Westpac believes two consecutive prints at seasonally-adjusted 0.6-0.7% q/q show that underlying inflation is within the band and so the RBA can continue easing in August. It believes that will be followed by 25bp cuts in November, February and May – all Statement on Monetary Policy meetings that include updated staff forecasts. 

• Westpac notes that Q2 CPI data “removes any awkwardness posed by inflation remaining too high for the RBA’s comfort, at the same time that the labour market might be starting to ease again”.
• “Further softening in the labour market would sit uncomfortably with a decision to hold the cash rate at restrictive levels when underlying inflation is so close to target.”
• “We expect the RBA to cut the cash rate by 25bps at its August meeting to 3.6%. With internal members likely switching their votes from hold to cut, we expect the external members who voted to hold in July will also switch to a vote to cut, leading to a unanimous decision.”
• “Assuming our expectations are borne out, that would take the cash rate to a trough of 2.85%. We think this is at the lower end of what could be regarded as neutral, and would reflect the RBA’s response to a path for underlying inflation that turns out a little lower than what it forecast in May.”
• RBA Deputy Governor Hauser speaks on Thursday and could give more information on “how the RBA staff are seeing the data and whether the ongoing disinflation revealed in today’s data is expected to continue”. “The Governor and Deputy Governor will not give guidance in public appearances between meetings. That would front-run the meeting and pre-empt the MPB’s decision.”

EXECUTIVE SUMMARY

• The two-day Bank of Japan (BoJ) policy meeting concludes on 31 July, with the central bank set to release its quarterly “Outlook for Economic Activity and Prices”, its monetary policy statement, and hold a press conference with Governor Kazuo Ueda.
• The BoJ is widely expected to keep its policy rate unchanged at 0.5% for a fourth consecutive meeting, amid signs of easing trade-related uncertainty since its June meeting.
• Most analysts continue to expect the next rate hike to occur in late 2025 or January 2026. However, timing remains fluid.
• Markets will pay close attention to Governor Ueda’s tone during the post-meeting press conference. Ueda has maintained a cautious stance since May, but if the forecasts and risk assessments are revised higher, there’s a high likelihood his tone may shift.
• However, with OIS markets pricing in a 65% chance of a 25bp rate hike by end-2025, the bar for a hawkish surprise is high. As a result, even a mild shift in tone could be interpreted as dovish, relative to expectations.
• Full preview here

The RBA has been reluctant to rely on the monthly CPI series as it only covers around two thirds of the quarterly index. However, in November the ABS will move to a complete monthly CPI for the October release which will run alongside the quarterly series until full seasonal adjustment factors are included. In June, the current trimmed mean CPI moderated to 2.1% y/y from 2.4% in May, the lowest since August 2021, and headline to 1.9% from 2.1%.

Australia monthly core CPIs y/y%

Source: MNI - Market News/ABS

• Another measure of underlying inflation, CPI ex volatile items & holiday travel, continued to run above the trimmed mean at 2.5% y/y but did moderate from 2.7% in May. However, June remained above the 2024 low of 2.4% and the 3-month annualised rate is 3.8%.
• Services and non-tradeables also moderated in June to 2.7% y/y and 2.8% y/y respectively. Services is its lowest since January 2022’s 2.4%.
• Goods inflation was steady at 1.1% and tradeables remained flat on the year. 

Australia monthly goods vs services CPIs y/y%