The Antipodean Strategist_ Tax on, tax off. Thu Feb 06 2025

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the Australian and New Zealand fixed income markets, particularly the interest rate strategies and economic indicators affecting these regions [2][4]. Core Insights and Arguments - Global Trade Policy Uncertainty: The current global trade policy remains uncertain, which reinforces a bullish bias on yields in the fixed income market [2][4]. - Australian Retail Spending: Positive retail spending news in Australia does not challenge the Reserve Bank of Australia's (RBA) forecasts, indicating a stable economic outlook [2][4]. - Inflation Dynamics: Recent Consumer Price Index (CPI) reports confirm that inflation dynamics in Australia have largely normalized, setting the stage for a gradual easing cycle [2][4]. - RBA Rate Cuts: A first RBA rate cut is fully priced for February 2025, with the overall pricing for 2025 appearing fair. The market anticipates a slight directional bias towards paying May RBA Overnight Indexed Swaps (OIS) with 55 basis points of cuts priced in [5][4]. - New Zealand Labor Market: New Zealand's 4Q labor market data shows rising unemployment, now up 1.7 percentage points from the trough, which may prompt the Reserve Bank of New Zealand (RBNZ) to implement another 50 basis point cut [17][4]. - Mortgage Rates in NZ: Despite new mortgage rates decreasing, average mortgage rates are still rising due to older mortgages rolling off, indicating a lack of cyclical traction in the New Zealand economy [27][4]. Additional Important Insights - Market Positioning: The report suggests staying received on AUD 3Yx1Y IRS and being underweight the belly of the ACGB Sep-26/Nov-28/Apr-33 fly, as this curve point is rich relative to the 3s/10s curve [2][4]. - Cross-Market Dynamics: The AUD has recently rallied on idiosyncratic factors, diverging from trends seen in other markets, which suggests a preference for intra-market expressions rather than cross-market trades [12][4]. - RBNZ's Easing Cycle: The RBNZ's rapid pivot to an easing cycle has seen NZD 1Yx1Y outperform AUD, but the market remains hesitant to push terminal rates materially below 3% [18][4]. - Trade Recommendations: The report includes specific trade recommendations such as receiving NZD 1Yx1Y IRS and holding NZGB Apr-33s against MMS [40][4]. Conclusion - The Australian and New Zealand fixed income markets are navigating a complex landscape of economic indicators, central bank policies, and market dynamics. The anticipated easing cycles in both countries, alongside the unique challenges faced by the New Zealand labor market, present both risks and opportunities for investors in these regions [2][4].