RBA’s cash rate futures imply an 89% chance of a policy pause in April

The RBA delivered a dovish 25bp hike last Tuesday, and on Wednesday Governor Lowe said during a speech that the RBA “are closer to the point where it will be appropriate to pause interest rate increases”. By the close of business, cash rate futures implied a 59% chance of a pause in April, yet that has now increased to 89% thanks to the fallout from SVIB (Silicon Valley Bank).

Whilst investors embraced full panic mode regards to SVB (rightly or wrongly), it does raise the odds that the Fed will hold their rates next week - especially if US inflation data comes in soft. And that would likely further increase the odds of an RBA pause in April.

Consumers in the doldrums:

A measure of Australian consumer sentiment by Westpac Bank paints a bleak picture, with the index sitting around its 30-year lows. Homebuyer sentiment is at its lowest level since 1989, confidence in the labour market is waning, prospects for sales of major household items is particularly bleak and family finances (compared to a year ago, or a year from now) remain negative.

Household spending plunged in January:

Household spending plunged -14.8% in January according to the latest ABS Australian Bureau of Statistics) report. As the RBA are closely watching trends of household spending, it can be taken as yet another sign that the RBA’s terminal rate is close. However, take note that the past four January’s have delivered double-digit negative prints, and it’s perhaps no coincidence that alcohol and tobacco were the only negative category as ‘dry January’ and good habits kicked in. So we’ll need to wait until next month’s release to see if households really are scaling back their purchases.

Employment data in focus on Thursday:

On Thursday the ABS (Australian Bureau of Statistics) release the monthly Labour Force report at 11:30 AEDT. We previously noted the slight cracks and potential of a turning point for the labour force, with unemployment ticking higher, participation rate lower and a couple of negative headline employment growth prints. If those cracks get wider, dare I say the case grows for a pause and calls for a peak rate at 3.6%? Maybe. Just maybe.

ASX 200 continues to plunge on contagion fears:

It’s really not been a great few days to be long risk, and must admit to being a little surprised at the size of the move lower on the ASX given its relatively small exposure to the US banking system. But it is what it is, and momentum has not been kind to bulls. The index currently trades below 7,000 for the first time since early January – when China confirmed the economy is reopening – but holding above 6900.

The question is how much more panic needs to be priced in, especially since the panic selling was less apparent on Wall Street overnight? So perhaps this is famous last words, but unless the situation regarding SVB gets worse, I am inclined to believe the bleeding will at least slow over the coming day/s, or perhaps even mean revert higher. Because if global sentiment is removed from the equation, equity traders can refocus upon the dovish RBA and data mentioned above. Whether it provides a bounce worthy of the risk remains to be seen, but a weak employment report (and soft US inflation tonight) could well support the ASX if the SVB dust settles.

The daily chart is on track to close beneath its lowest Bollinger Band for a third consecutive day, and at the time of writing 120 stocks (60%) have their RSI (2) at oversold, below 10. So a period of mean reversion could be nearing. With that said, high levels of volatility for not for everyone, and sometimes the best trade is to not place one at all.  Either way, 6900 is clearly a pivot level for traders to pick their side around.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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