AUSTRALIA’S CENTRAL BANK FUELS SPECULATION OF NEARING INTEREST RATE PEAK

The debate regarding the global economy will hit “peak rates” has intensified this week, with Australia’s supercharged market discussion throwing fresh focus on the issue.

For stock and bond bulls, Australia’s dovish rate decision is a sign that central banks worldwide are getting closer to the end of their rate-hiking cycles.

“I think we are getting to the point where markets are pricing in peak rates,” Ned Bell, chief investment officer at Melbourne-based Bell Asset Management, a global equity fund manager, said.

“You will start to see the trajectory of inflation moderate, which 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.”

After a Monday decline in a US indicator of factory activity suggested its economy may be failing, the RBA surprised the market. Bonds are also being sought after by many investors, including Steven Wieting of Citigroup Inc. and JPMorgan Asset Management. They are attracted by favourable valuations and rising expectations of an economic slump.

At 5:23 am New York on Tuesday, two-year Treasury yields decreased by around eight basis points to 4.03%, adding to the previous day’s 17 basis point drop. Australian three-year bond yield fell 32 basis points as the nation’s leading stock index rose to its highest since June 2020. 

After the central bank lifted interest rates by a lesser-than-expected 25 basis points, the yields on rate-sensitive three-year Australian government bonds fell to their lowest level since 2008. The surprise action sent shockwaves through the world’s financial markets, reviving the surge in Treasuries, lowering New Zealand yields, and igniting a rally in Japanese stocks.

Since the RBA abruptly abandoned curve management in late 2021, Australia has served as a lead indicator for at least the bond market. This caused local yields to spike.

Only time will tell if Australia’s dovish rate decision was an isolated incident or the start of a new trend among central banks. In either case, it provides a much-needed boost for global stock and bond bulls struggling in recent months.