Australia and NZ - Weekly Prospects 27 July

Australia and New Zealand - Weekly Prospects

We recently changed our RBA and RBNZ calls, removing the additional easing pencilled in for later this year and adding rate hikes from mid-2010. Last week, we became more comfortable with our revised RBA call, following the release of minutes from the Board’s last meeting, which described improving economic conditions, and the 2Q CPI report, which showed sticky core inflation. The market now is looking to the speech by RBA Governor Stevens tomorrow for further clues on the interest rate outlook. The Governor’s appearance is an opportunity to massage expectations away from the belief that further rate cuts are more likely than hikes. RBA officials, however, do not make sudden moves, so the change of tone tomorrow will be subtle. In fact, officials probably will use the other RBA events scheduled for coming weeks, including a quarterly statement and Parliamentary testimony, to gradually distance themselves from references to a lower cash rate.

• On the RBNZ, the statement accompanying Thursday’s cash rate decision should provide further clues on the monetary policy trajectory. We believe the OCR will be unchanged this week and for another year, after which the RBNZ will start withdrawing policy accommodation. The RBNZ will, however, leave open the door to further policy easing, saying the OCR will remain “at or below” current levels until the end of 2010. In our view, it will take a material deterioration in the global outlook, or a significant tightening of domestic monetary conditions, to trigger further cuts. Also this week, the NBNZ business confidence survey should deliver another improvement in July.

• Powerful momentum is building in the global manufacturing sector, a development that is expected to lift economic activity across the globe this quarter, producing the first meaningful gains in global GDP in over a year. Asia represents the leading edge of the global manufacturing surge; the rapid advance in this region into midyear is encouraging. June reports on exports from Japan and export orders and IP from Taiwan delivered very large gains compared to May that were well above expectations.

• With increasing confidence that the global economy is lifting, it is not surprising that there is a heightened focus on central banks’ eventual exit strategies. This issue was front and centre last week in Fed Chairman Bernanke’s congressional testimony and groundbreaking op-ed. While he reaffirmed that the Fed is far from rushing for the exit, Bernanke’s comments added to the impression that quantitative easing (QE) is reaching its limits, and that the Fed is prepared to maintain a massive balance sheet for years to come.

• Incoming data show that the V-shaped recovery that began in Asia in 2Q09 is carrying over into the current quarter. Last week’s report that Korea’s economy expanded at a nearly 10% annual rate last quarter leaves EM Asia on track for a double-digit GDP gain in 2Q. The details of the report were better than expected. In particular, the boom in GDP growth occurred as a surge in consumption and investment spending more than offset even faster inventory destocking, a pattern that bodes well for future growth.

Australia and NZ Weekly Prospects Full Report (pdf)

ENDS

© Scoop Media