Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• Last week’s remarkably strong Aussie employment numbers are not enough to push the RBA over the line for a March rate hike. After all, hours worked fell during the month—the huge jobs gain masks what could be underlying weakness, and the leading indicators have softened. Moreover, since the RBA’s surprise decision two weeks ago to leave the policy rate unchanged, other data has disappointed—retail sales, home loans, and consumer confidence each fell. The next move in the cash rate will be a quarter point hike in April. This week sees two important RBA events, each of which will colour thinking about the next move. First, Tuesday sees the release of the minutes from the February meeting—the key will be the degree to which Board members were unclear about how consumers were coping with last year’s rate hikes. On Friday, Governor Stevens fronts a Parliamentary committee in Canberra. Topics of interest will include (of course) the rate decision, the situation in Greece, the imminent withdrawal of the bank guarantee, and any other potential political point-scorers sitting MPs can come up with.

• In New Zealand, with data last week showing that consumer spending stalled and housing activity eased, it appears the domestic economy already is losing momentum. Solid net permanent migration flows, low interest rates, and significant discounting among retailers was not enough to entice consumers to open their purse strings late last year. The good news is that recent surveys have signalled consumer sentiment toward current conditions has improved significantly, meaning that consumers may ostart spending in coming months. The soft data flow may have bought the RBNZ more time on the policy sidelines, but with inflation pressures to become a growing source of concern, there remains a good case for the RBNZ to start the next tightening cycle earlier than official guidance currently suggests.

• Global growth indicators remain solid but policy risks are weighing heavily on markets. In the developed world, concerns about unprecedented fiscal deficits widened sovereign spreads and raised particular concern about the credibility of Europe’s political institutions. In emerging markets, the looming monetary adjustments facing China and other Asian economies have raised the fear of a disruptive policy adjustment that weakens global growth. On net, we are confident that the broad thrust of this year’s policy stance will remain highly accommodative and limit the contagion of market stresses emanating from Greece. Beyond this year, there is still little clarity or confidence that policymakers can engineer a smooth path toward normalized stances.

• The EU is concerned about contagion, both to other sovereigns where fiscal positions more legitimately reflect adverse macro developments, and to financial institutions in the region that hold significant amounts of Greek debt. This concern motivates the EU’s desire to “take determined and coordinated action, if needed, to safeguard financial stability in the region as a whole.” As a result, Greece has been given the carrot of loans, credit lines, and guarantees, conditional on the implementation of appropriate fiscal measures. Thus far, progress has been slow: much more needs to happen before Greece writes its first report to the Commission on March 16 that explains how the implementation of this year’s budget is progressing.

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