Global stock and bond bulls are hoping the market impact of Australia’s dovish rate surprise will stick as it offers their best chance at arguing the worldwide wave of disruptive hikes is closer to the end than the beginning.

Yields on rate-sensitive three-year Australian government bonds plunged by the most since 2008 after the central bank raised interest-rates by a less-than-expected 25 basis points Tuesday. The unexpected move ricocheted around global financial markets, giving a fresh boost to the rally in Treasuries, pushing New Zealand yields lower and helping turbocharge a rally in Japanese equities.

The Reserve Bank of Australia’s dovish surprise will be interpreted by some as a sign that the end is in sight to the wave of aggressive monetary tightening that has steamrolled global bonds and equities this year. Australia has acted as a lead indicator for at least the bond market since late 2021, when the RBA’s sudden abandonment of curve control sent local yields spiking.

“I think we are getting to the point where markets are pricing in peak rates,” said Ned Bell, chief investment officer at Bell Asset Management, a global equities fund manager based in Melbourne. “You will start to see the trajectory of inflation moderate and that should be a good sign that you’ll see similar moves from what we’ve seen from the RBA today. The magnitude of rate hikes will slow.”

 RBA’s surprise came after a Monday drop in a US gauge of factory activity suggested its economy may be faltering. A growing cohort of investors are also scooping up bonds, with the likes of Citigroup Inc.’s Steven Wieting and JPMorgan Asset Management drawn by attractive valuations and growing bets for an economic downturn.

Two-year Treasury yields fell about seven basis points to 4.05% on Tuesday, adding to the 17 basis point decline on the prior day. The three-year Australian bond yield plunged 32 basis points, while the nation’s benchmark stock index rallied by the most since June 2020.

“Central banks are grappling with inflation and other growth/leverage factors,” said Viraj Patel, strategist at Vanda Research. “More central banks will be taking it slow in Q4.”

The RBA ended a streak of outsized increases, a result predicted by only a quarter of economists surveyed. Still, any global read-across is complicated by the fact that Australian policymakers are mindful of the indebtedness of their household sector and the prevalence of variable mortgage rates which means hikes are particularly impactful.

Own Tune

“The RBA is clearly dancing to its own tune,” said Andrew Ticehurst, a rates strategist at Nomura Holdings. “The other major G10 central banks have been delivering a consistently more hawkish message in our view.”

All eyes now turn to the Reserve Bank of New Zealand, which is set to announce its monetary policy decision on Wednesday with some economists expecting a signal of continued tightening. A hawkish surprise from the central bank at the forefront of global rate hikes could potentially knock the wind out of bond bulls’ sails.

Strategists like Australia and New Zealand Banking Group Ltd.’s John Bromhead cautions against betting on rates peaking globally too quickly particularly from the Federal Reserve, despite Tuesday’s dovish surprise.

“Rhetoric from virtually all the Fed members so far is they are cautious of making a 70’s style mistake -- by pausing too early,” he said. “I’d be cautious of extrapolating RBA decisions too far.”

Source:
courtesy of BLOOMBERG

by Ruth Carson and Richard Henderson

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