Australia and NZ - Weekly Prospects, 9 July 07

Australia and New Zealand - Weekly Prospects

* In Australia, the RBA's decision to leave the cash rate unchanged last week means the pre-election rate hike window has all but closed. There is a small chance of an August hike, but the forecast now is for two 25bp moves in the first half of 2008—in February and May. With the RBA having passed on the best chance of making a pre-emptive move, though, the risk now is that the cash rate has to rise more than twice more. This week sees the release of home loans (we expect a fall), employment (a 20,000 rise) and consumer confidence (up 3%) data. The largest sign-post for the RBA, though, is the 25 July 2Q CPI report, which is likely to see annual headline inflation drop below the RBA's target range—a rate hike straight after that would be awkward to explain.

* Property prices in New Zealand continued to climb in June, despite a reduction in trading activity. The latest TVNZ consumer confidence survey (released this morning), showed confidence fell in July to the lowest level since October 2006, as 41% of respondents expect the economy to deteriorate over the next year. In a quiet week for data last week, two second-tier data points gave contrasting messages. The ANZ's world commodity price index continued to fly high, as dairy prices surged 13%m/m in June. Westpac's employment confidence survey, however, betrayed increased insecurity over future job prospects. That said, all eyes remain fixed on this week's top tier data flow, and the nontradables inflation data due next week. NZIER's quarterly survey of business opinion will be the highlight this week.

* A picture of a global economy picking up momentum at midyear is coming into focus. There is now ample confirmation of the anticipated rebound in global manufacturing. Indeed, JPMorgan's June global manufacturing PMI output index rose to 57.5, a level consistent with factory output growth exceeding 5%, while the orders/inventory ratio moved to its highest level in 18 months, signaling that momentum continues to build at midyear.

* The breadth of the manufacturing sector upturn is impressive. Last week's US reports, including the ISM manufacturing survey, factory orders, and manufacturing hours worked, point to a return of broadly based growth in the industrial sector. In Asia, Korea posted another strong advance in exports, alongside a solid gain in the Singapore PMI. This week's reports should bring similarly positive results on exports from China and Taiwan. Elsewhere, the European manufacturing PMIs also made unexpected gains, suggesting that the recent slowdown in Euro area output growth was exaggerated. The same message came from the big gain in German industrial orders.

Regards,

Stephen Walters Chief Economist

ENDS

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Australia and New Zealand - Weekly Prospects (PDF)

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