I think there’s a chance that markets have underreacted to economic data since the last Bank of Canada meeting in January. Data was poor - PMI inch down, core failing to take off, exports poor, retail sales down, housing starts okay, unemployment okay. BA U8 up +11 from 97.86 to 97.97 and BA U9 up +4 from 97.54 to 97.58, so hikes are postponed rather than cancelled. BA U8-H8 is 32.5 bps, hardly changed from the previous meeting. April meeting with forecast is before the March CPI, so they will have seen only 1 more CPI print, so a no-goer. H8-U8 then covers July forecast+meeting and half of October forecast+meeting. This is bit much to price 32.5 for 1.5 meetings given poor data. Steel tariffs are not helping NAFTA negotiations, oil price is down, stocks underperformed S&P and down some 6%.
I don’t know if there is sector composition explanation for SPX/SX5E outperformance, but it’s up 14% since last March (and more than 20% since last May when Macron won). Given that equity weakness originated in the US last month and that the US’s P/E is higher, I’d expect SPX/SX5E to have fallen. A number of conference-calls by multi-asset fund managers I listened to in December had almost consensus view that Eurozone and Japan are the place to be in 2018 and US market is too expensive – and this was before the January outperformance by SPX.
White and red IR’s do not look too interesting right now. IR Z8-H8 at 16 (and Z8-Z9 at 34) suggests that markets do expect RBA to make a move eventually. I am somewhat skeptical that RBA are at this point convinced that wage growth is coming and will be hawkish this week but market pricing does not look too wrong. The absolute bottom in those spreads were closer to 10 bps and 25 bps when we had poor CPI and very dovish comments. This looks like absolute bottom pricing, so Z9 looks like a good short if RBA are dovish and it’s down some 7-10 bps in the coming weeks.
AUDNZD looks more interesting here. It’s gone down some 3% in February and looking 2-5% too low to me. RBNZ are no more hawkish than RBA are (and rate differential moved <5 bps in favor of NZD), so either FX players are pricing a more dovish RBA than STIR players are (and STIR players seem to price it okay) or someone decided that NZD is no longer a commodity price and should be immune to S&P and metals going lower.
Australia – US 10y widening has been an absolute disaster so far and gone from 40 bps in November to zero now in swaps (and negative in XT-UXY), though my voodoo magic model showed it was 10 bps too narrow at 40.. and 15 bps too narrow at 0. As alluded above, I am happy with pricing rate pricing in the next two years, but not sure about 2s10 at 70 bps. This looks bit too low for a central bank that will be slow and gentle in the near future but with a high neutral rate (3% above current rate). It’s trading in the mid of the 2017 range and should probably go higher given improved global econ growth. If budget deficits do matter, then this should also weigh. Scott Morrison’s balanced budgets are about as credible as Chan-o-cha’s promises to hold elections in Thailand.
An interesting observation is that in the past year the three times Australian 10y yields went up the causes were beta global movements (Sintra, global risk-on in Sep, BoJ stealth tapeR), and subsequently were dragged down, so it seems someone found 2.9-3% yield attractive. The question if it’s still attractive given no spread over US.
