Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• In an otherwise quiet week in Australia, the minutes from the RBA’s last Board meeting two weeks ago will be released on Tuesday. Hopefully, they will explain in detail the reasons behind the Board’s adoption of a more hawkish tone in the statement announcing the decision to leave the cash rate steady at the “emergency” setting of 3%. The retail and employment data last week was on the soft side, but business and consumer confidence bounced, as did job advertisements. We maintain our view, therefore, that the RBA’s first rate hike probably will be announced at the next Board meeting in early October. This is provided we see further improvement in conditions offshore and avoid a sharp reversal in key domestic economic indicators. The economy has flown into a post-stimulus “air-pocket”, but the longer term outlook is brightening, thanks mainly to a bulging mining investment pipeline. Indeed, this week we are pushing through an upgrade to the 2010 growth forecast to 2.9%, from 2.0%.

• We expect the RBNZ’s next tightening cycle will not begin until mid-2010. RBNZ Governor Bollard last week maintained a dovish tone in the statement announcing his decision to leave the cash rate steady at 2.5% for the sixth straight month. He reiterated that the official cash rate will remain “at or below” current levels until the end of 2010. Our forecast calls for the first rate hike to be delivered in July next year.

• We are forecasting US August core CPI to fall 0.1%m/m this week, an event that would represent the first monthly price decline in more than a quarter century. While price discounts due to the “Cash for Clunkers” scheme are contributing to this decline, the details of the report are likely to reinforce the message that the underlying inflation trend in the developed world remains decidedly downward. For the US and Euro area, core inflation is expected to breach historical lows—falling below 1% next year. In Japan, we also forecast new lows with core prices expected to drop 1.5% in 2010.

• It may seem unusual to anticipate falling core inflation in the G-3 alongside our expectations of sustained above-trend growth, firming global commodity prices, and a continued fall in G-3 currencies vis a vis emerging markets. But these are unusual times. No expansion during the post-World War II era has taken hold with a sharper contrast between the depressed level of developed world activity and the strong lift in global growth expected over the coming quarters. As a result, the macroeconomic landscape is delivering a number of counterintuitive outcomes.

• China’s August data provided few surprises, confirming that growth remains strong with a rotation in demand away from public investment underway. Like other countries in EM Asia, China’s manufacturing surge is waning, but the August IP reading is putting 3Q09 on track for a still-buoyant quarterly growth rate of 18%ar. CPI deflation eased as expected due to a jump in food prices, while the decline in nonfood prices fell just 2.0%oya. We expect China’s headline CPI to start rising later this year, owing to fading base effects, continued resource price liberalization, and food price increases.

Aus NZ Weekly Sep 14 (pdf)

ENDS

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