Australia and NZ - Weekly Prospects 19.10.09

Australia and New Zealand - Weekly Prospects

• Comments from RBA Governor Stevens last week, suggesting that it would be a mistake for the Bank to be “too timid” to raise interest rates, prompted financial markets to tip seven interest rate rises in a row. The speech, in our view, though, was an attempt to explain why the RBA kicked off the tightening cycle in early October, and was not intended to signal the timing of future rate moves. Stevens highlighted the uncertain global outlook and that monetary policy settings in Australia needed to ensure that the recovery in the domestic economy is sustainable. This reinforced that the cash rate will be increased “gradually.” We acknowledge the significant risk of a November move, but believe the RBA will sit on the sidelines until December. By then, the RBA will have more information on which to gauge the strength of consumers in a post-rate-hike world, more data to assess the strength of the global economy, and can avoid having to explain a rate hike in the wake of what should be a weak CPI report (Oct. 28).

• In New Zealand, market speculation that the RBNZ will lift rates in early 2010 picked up last week after 3Q CPI printed on the upside of expectations. Inflation remained in the bottom half of the RBNZ’s 1-3%oya target range, however, and the headline, at 1.7%oya, was driven higher by one-off influences. Our forecast is for a 50bp hike in mid-2010 and the RBNZ to shift to a neutral policy stance in December or early 2010, even though financial markets are sceptical of Governor Bollard’s commitment to maintaining the OCR “at or below current levels until late 2010.”

• The global economy has experienced an unprecedented phase of acceleration this year. Global GDP swung from a 7.5% annualized contraction in 1Q09 to an estimated 3.7% advance last quarter. The turn in manufacturing was even more dramatic as output moved from a 28% rate of descent to a 12% pace of gain. Against the backdrop of this rapid shift from deep contraction to above-trend growth, it is not surprising that asset prices and economic projections have also moved materially higher.

• We believe that this acceleration phase is coming to an end and a transition from “lift to carry” is under way. GDP growth is expected to remain strong but is not likely to accelerate further. As a result, economic data releases should produce less consistent upside surprises. This transition should be accompanied by a moderation in the pace of manufacturing output growth. However, demand indicators should show signs of broadening across sectors and countries. And this broadening should be accompanied by more balanced income gains as this year’s rebound in corporate profits gradually gives way to rising employment and labour income. A successful transition to more broadly based growth in the coming months is the key for sustaining a synchronized expansion through 2010.

Full release: Weekly191009.pdf

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