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Rates market spooked momentarily by floods

Christopher Joye
14 January 2011

It has been interesting watching the interest rate futures market over the last few weeks. Prior to the floods and the advent of the upward price pressures that the destruction of the supply-side will inevitably induce, the bank bill futures market was comfortably pricing in at least two hikes before the end of 2011.

Care of the QLD disaster one and a half of these hikes disappeared. That is, the bank bill – not interbank – market was pricing less than one cash rate increase by the end of the year. There was an instant and quite dramatic reaction in the hour or so following the Brisbane evacuation with futures prices surging. The unemployment data confused investors.

Immediately after the release yesterday the market rallied presumably because of the low total employment number, which it took as a sign of weakness even though there are huge monthly standard errors associated with this data. But an hour or so later, the market sold off solidly when it worked out that it was the unemployment rate that is far and away most important for forecasting inflation, and that had fallen to less than the crucial five per cent threshold associated with the NAIRU.

With some suggesting that the QLD rebuild will add another $20 billion worth of investment to the economy, and the US recovering much better than the RBA expected, the risks to rates and inflation lie well and truly to the upside. Aloha from Honolulu airport!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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