Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

Summary

The week ahead is huge for RBA activity, with a policy decision Tuesday, a speech by the Governor Thursday, and the quarterly statement on Friday.

There also is a wave of important economic data scheduled for release. Most importantly, the RBA will deliver a 25bp rate hike tomorrow (see our research note from page 3 for details). To summarise, the 3Q CPI print was a little on the high side, but was not sufficiently alarming to trigger a larger move. RBA officials will tread cautiously to avoid tripping over the recovery that remains in its early stages. Yes, officials will unwind the “emergency” policy settings that no longer are appropriate, but slowly, as the downside risks that loomed large earlier this year recede further into the background. The RBA’s statement on Friday will include higher forecasts for both growth and inflation— the forecast trough for core inflation now will be 2.75% (or even 3%), not the 2% predicted in August. On Thursday night, Governor Stevens’ speech will take us further along “The Road to Prosperity”.

• The RBNZ left the cash rate unchanged at 2.5% last week, but Governor Bollard now expects to keep the OCR “at” the current level, rather than “at or below,” as in previous commentary, until 2H10. The strategic tweaking of the wording confirmed the OCR has troughed, and paves the way for the Governor to hike rates in 2010. In other words, the RBNZ has moved to a neutral bias. The RBNZ sees no “urgency” in withdrawing policy stimulus; thus, we maintain our forecast that the first rate hike, a 50bp move, will not be delivered until July next year. One key anxiety for the RBNZ is the risk of another debt-fuelled spending spree. We believe that any recovery in household spending will be limited, though, by rising unemployment and softer wage growth, as should be indicated by data due for release this week.

• Although activity indicators have been pointing upward for some time, it is still encouraging to see that the US economy exited recession last quarter.

Indeed, sandwiched between the boomy 9.7% annualized increase already reported for Emerging Asia and gains of 3% expected for the Euro area and Japan, last week’s report of a 3.5% annualized 3Q09 US GDP gain confirms that a synchronized global upturn is now underway. Analysis of the US GDP report centered on the role temporary fiscal supports played in lifting the economy out of recession. Fiscal policy’s imprint is directly reflected in the rise in home and auto sales last quarter. There is also an indirect imprint of US federal transfers—tempering declines in state and local spending—and global fiscal initiatives that helped lift global demand and produce a doubledigit annualized gain in US exports.

• This week’s October reports will provide information on how the global economy is turning towards year-end. If we are right, our global manufacturing PMI survey will stabilize at a level recently associated with double-digit global IP growth.

In the US, consumer confidence has taken a step backwards this month, raising questions about the current quarter. We are expecting October activity indicators to display positive momentum with payroll declines moderating (-140,000) and auto sales reversing part of last month’s sharp slide.

Australia and New Zealand - Weekly Prospects (with tables) (pdf)

ENDS

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