Australia’s bonds and stocks rallied after influential economist Bill Evans threw his weight behind calls that the central bank will cut interest rates next month when the government unveils its budget plans. The currency tumbled.
Yields on the three-year bond drop as much as seven basis points to a record low of 0.14%, while the benchmark stock index gained more than 2%. The Reserve Bank of Australia will probably cut policy rates to 0.10% while also moving its bond yield target to the same level when it meets on October 6, Westpac Banking Corp.’s Evans said in a note.
Evans, who has a reputation for accurately predicting RBA policy shifts, joins other strategists who see a coordinated fiscal and monetary effort next month when the government is expected to announce new stimulus spending. When central bank Deputy Governor Guy Debelle spoke on Tuesday, he pointed out the drawbacks from other policy options including currency intervention, leaving traders to conclude that a rate cut is most likely.
“Expectations are gathering that the RBA will tweak its benchmark interest rate settings lower,” said Tom Nash, strategist at HSBC Holdings Plc in Sydney. “This is significant for ACGBs, and we have been highlighting how short-dated yields have room to drop lower on the basis that such a move would likely include a cut to the
three-year bond yield target.”
The RBA’s current cash rate and bond yield target are at 0.25%. Other than Westpac, Goldman Sachs Group Inc. and National Australia Bank Ltd. have also forecast more easing measures. Local newspapers have said the government could inject large amounts of money into the pandemic-stricken economy and provide extra infrastructure spending funds.
Australian stocks are the top performers in Asia, rising the most since July 21. They’re defying a selloff in other markets, as rising concerns over possible new virus-related restrictions dent risk sentiment.
“The possible announcements of both greater monetary and fiscal stimulus –- when the budget is handed down in the same week -– has put a new coat of paint on the economic outlook,” IG Markets Ltd. analyst Kyle Rodda said. “That’s why we’re seeing consumer stocks and the financials underpin today’s rally.”
The need for more stimulus was reinforced with the release of August retail sales data, which showed spending dropped 4.2% from the previous month. Evans argued that the RBA isn’t likely to sit back to assess the budget before acting.
The overnight index swap market had already priced for RBA’s policy rates to slide to around 0.06%. The Australian dollar dropped as much as 0.8% to 71.16 US cents.
Evans’ call comes as Australia sold A$25 billion ($17.8 billion) in new six-year bonds, its fourth-record breaking sale this year as global investors pile into the nation’s debt. The 0.50% September 2026 bonds were priced with a yield of 0.47%, according to the Australian Office of Financial Management.
Andrew Ticehurst, a strategist at Nomura Holdings Inc. who has been calling for further RBA easing since September 11, sees the three-year yield breaking new lows next month. “We think the decline in three year yields is fair, we expect these yields to be as low as 0.10% on October 6,” he said.