Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The clear highlight in Australia last week was the shift in the RBA’s implied policy bias from easing to neutral. The tone of the policy announcement Tuesday and the quarterly statement Friday became decisively more hawkish, signalling that further rate cuts now are very unlikely. Friday’s statement also included material upgrades to the growth and inflation forecasts. We expect the first rate hike to come by June 2010; a softening of the economic data in coming months as the policy stimulus fades should provide scope for the RBA to stand pat in the interim as other uncertainties dissipate. The RBA would hike before year-end only if the data remains firm. This week sees the release of consumer and business confidence surveys and the June home loans data. All three measures should show improvement to follow last week’s bounces in employment, house prices, retail sales volumes, and exports. Also, RBA Governor Stevens testifies to Parliament on Friday.

• With data last week indicating that labour market conditions deteriorated markedly in New Zealand in the June quarter, the outlook for consumption remains weak. The retail numbers this week should show sales values fell 0.5%m/m in June. More importantly, the quarterly retail sales numbers are key to our 2Q GDP growth forecast. Thanks largely to the significant discounting that has occurred among Kiwi retailers, we expect a rise in volumes in 2Q, after the 2.9%q/q slump in the previous quarter.

• There is no reason to cheer a US employment report which delivered significant shedding of full time jobs. But there is every reason to view the July report as part and parcel of the recent news flow indicating that a synchronized global growth “bounce” is taking hold. The manufacturing component of the report shows jobs and hours swinging away from sharp contraction and this week July manufacturing output is expected to record a greater than 1% monthly gain. With our global manufacturing PMI survey reporting a record high orders/inventory ratio last month there is every reason to expect this rebound to be mirrored across Europe and the Americas. With little evidence of a loss of momentum in Asia, we continue to look for a six month phase of 8% annualized growth in global manufacturing—its fastest pace of gain since the mid-1980s.

• While lights are flashing green for a synchronized global recovery, central banks are not in any rush to begin normalizing their policy stances. In part, this reflects their caution on the growth outlook. However, there are more basic forces at work. Although central banks are likely to see more growth than they currently expect, even the realization of our upbeat forecasts will deliver less growth than is needed. Across the US and Europe credit losses are likely to increase for some time to come, promoting a slow and painful healing of banking systems. What’s more, the recession has depressed resource utilization rates to their lowest levels in decades. For example, our estimates suggest that the US economy would need to grow more than 5% for three full years to bring utilization rates back to their average levels during the past two expansions. It is in the context of this arithmetic that the FOMC should reiterate its low for long message following this week’s meeting.

JP Morgan Weekly Report (pdf)

ENDS

© Scoop Media