RBA: Tone To Be Scrutinised At Today’s Decision, May Wait For Q4 CPI Though
Dec-09 00:09
The RBA is unanimously expected to leave rates at 3.6% when it announces its decision today at 1430 AEDT (see MNI RBA Preview). It will be followed by Governor Bullock’s press conference at 1530 AEDT. With the outcome widely forecast, the statement and her tone will be scrutinised for any changes in stance and balanced view around the outlook. The Board may want to see more information before it makes any major changes, especially as the October CPI was the first read on the new monthly series. Q4 CPI on 28 January, November consumption and November & December jobs will important releases.
- NAB expects the RBA to sound more hawkish given that inflation rose further above the top of the band in October and “signs of momentum in private demand”. It is forecasting no rate changes in H1 2026 but that could change depending on inflation, activity and labour data.
- ANZ notes that a hike in December would surprise them less than a cut. It also expects a hawkish shift with the RBA noting “uncomfortably high inflation pressures” and as a result has removed its H1 2026 cut and is forecasting unchanged rates through 2026. It can see scenarios for both easing and tightening though.
- CBA observes that since the November RBA decision there has been further evidence of tighter capacity and upside inflation risks and so it expects the Board to “acknowledge the increased risk of higher inflation and the shift in the balance of risks around monetary policy”. CBA doesn’t believe that there will be “major changes” to the RBA’s tone this month but it will maintain its flexibility while waiting for Q4 CPI.
- Westpac is projecting that softer supply capacity will drive inflation lower in 2026 and as a result create “scope for rate cuts in May and August next year”.
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FED: Fed Assets Pull Back, But Reserve Management Buys Eyed In 2026 (2/2)
Nov-07 21:58
Indeed NY's Williams has already begun pointing to potential for balance sheet re-expansion to begin again, with "reserve management" purchases intended to keep Fed liabilities rising in line with market demand:
- "Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample. It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed’s other liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy."
- The prevailing consensus is that such reserve management purchases will begin by the end of Q1 2026 if not earlier, with t-bills bought and in amounts of up to $20B a month.
- Meanwhile in the final countdown to the end of QT on December 1, net SOMA runoff was around $4B in the last week, with a pace of around $20B overall over the last month.
- Takeup of the Fed's lending facilities pulled back in the week to Wednesday Nov 5, halving to just over $11B as month-end pressures abated. This was due almost entirely to a $10.2B drop in dealer repo operation takeup, the spike in which last week marked the highest since 2020.
FED: Reserves Tick Up Slightly In Latest Week, But Still Near "Ample" (1/2)
Nov-07 21:53
The Fed's latest H.4.1 release on Nov 5 showed reserves picked up from the prior week's post-2020 lows to $2.85T, up $24B in the latest week but still down $182B over the last month.
- This of course has been the mirror image of movements in the Treasury General Account which briefly touched $1T though settled Wednesday at $943B (a fall of $41B on the week, but a rise of $149B in a month).
- Treasury indicated this week that it maintained its $850B quarter-end cash target, with the recent buildup due in part to the federal government shutdown slowing outflows but also a typical cautionary cash rase ahead of large seasonal expenditures.
- The Fed's reverse repo facilities remained in relatively negligible territory albeit with a slight pickup at month-end October.
- Overall the Fed has recognized that it may be getting close to the transition point between once-"abundant" and now merely "ample" reserves, hence October's decision to end net asset runoff as of Dec 1.
- NY Fed President Williams said Friday morning “Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves."
FED: Financial Stability Report Eyes Term Premia And "Opaque" Financing Risks
Nov-07 21:31
A few highlights from the Fed's latest Financial Stability report out today (link):
- In terms of asset valuations, "Prices remained high relative to their historical relationship with fundamentals across a range of markets."
- The report highlights high leverage in the financial sector: "Vulnerabilities associated with financial leverage remained notable. Over the past few years, hedge funds’ leverage has steadily increased across a broad range of strategies, including those involving Treasury securities, interest rate derivatives, and equities"
- However "Vulnerabilities from business and household debt remained moderate" and "The banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements."
- In terms of future risks, "A further increase in term premiums leading to higher-than-anticipated long-term interest rates, particularly if accompanied by
persistent inflation, could pose risks for both borrowers and lenders" - And the Fed has its eye on "opaque off-balance-sheet funding arrangements" re the recent voliatility caused by First Brands and Tricolor: "The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms."
