Australian bonds rally on weak Q1 consumer inflation

The Australian bonds rallied on Wednesday after reading weaker-than-expected consumer inflation figure, rising investors expectation for further policy easing from Reserve bank of Australia (RBA) in its upcoming meeting. Also, investors await Federal Reserve’s monetary policy meeting and Federal Reserve Chair Janet Yellen’s speech in an attempt to estimate the Fed's likely next step to raise interest rate. The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved lower 2.07 pct to 2.608 pct and the yield on the 2-year Treasury bond ticked down 5.89 pct to 1.950 pct by 0515 GMT.

The Australian Q1 Headline inflation tumbled 0.2 pct q/q, against market expectation of 0.2 pct q/q rise, from up 0.4 pct in the last quarter of 2015. Similarly, consumer prices rose 1.3 pct y/y in March, much lower than 1.8 pct expected and 1.7 pct observed in last quarter, which is lower than the RBA’s inflation target between 2-3 pct. This increases the possibilities for further Reserve Bank of Australia easing in the up-coming policy meeting.

We foresee that if Reserve Bank of Australia (RBA) wants to ease policy further, then inflation won’t be an issue going by the latest release today, which saw quite a pullback. However, it is unlikely for RBA, which has kept policy on hold, since last summer, will be very much eager to ease policy. Country’s real estate prices are still under upward pressure, due to foreign buying on weaker Aussie and domestic buying on lower interest rates.

Today, the U.S. Federal Reserve will announce its policy decision at 1800 GMT; markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Moreover, focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates.

Meanwhile, Australia's S&P/ASX 200 fell 0.82 pct to 5,172.5 by 0515 GMT.