Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• Last week, the RBA lifted the cash rate for the fifth time in six meetings; on this evidence, the pace of this tightening cycle no longer can be described as “gradual.” The commentary announcing the hike was hawkish, with officials seemingly anxious about the positive impact of the rebound in the terms of trade and “buoyant” conditions in the housing market. With neither of these “hot” policy issues likely to cool in the near term, we look for a third straight hike after the May 4 Board meeting. That said, the 1Q CPI print on April 28 clearly will influence the May decision. Last week saw yet another healthy gain in employment, but a surprise drop in hours worked. The week ahead is likely to see falls in both home loan approvals and consumer confidence (the confidence survey was collected after the rate hike), while Guy Debelle, the RBA’s Assistant Governor (Financial Markets) testifies to a Parliamentary committee this morning on financing conditions for small business.

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The data flow in New Zealand has slowed to a trickle in recent weeks. The NZIER QSBO last week was, however, the highlight. Falling in line with other business surveys, the QSBO showed that firms have recently become slightly less upbeat. On the upside, though, investment intentions have surged to above long-run average levels. It is too early to tell whether the increase in investment plans will translate into new hiring, particularly given the recent decline in corporate profitability. New Zealand firms are still finding it difficult to raise prices given that demand remains weak. This supports our view that consumer spending will haved remained soft in February, with retail sales numbers this week likely to show a modest rise of 0.3%m/m.

• The economic news continues to signal that global growth is picking up this quarter amid a significant broadening in its base. On the heels of a strong gain in our March manufacturing PMI survey, the service sector survey, which had been surprisingly weak, surged last week to the highest level since August 2007 For the first time since last summer, we are raising our sights on 2010 global growth. An upward revision to Asian growth is now complete, with last week’s change in Japan followed by a significant markup to many of the smaller Asian economies this week. Our growth forecasts for the UK and Canada are now on a revision watch. With this week’s US March retail sales report likely to show consumption gaining momentum, the risk to our 4% forecast for US 2Q growth appears to have shifted to the upside.

• Recent political developments have opened the door to a shift in China’s FX and interest rate policy, which could happen at any time. Following President Hu’s decision to attend this week’s nuclear security summit in Washington, Treasury Secretary Geithner announced last week that the government’s semiannual FX report would be delayed and then met with the Vice Premier of China in Beijing. With the politics and fundamentals now in alignment, we look for China to allow the resumption of gradual CNY/USD appreciation this month or next, with the rate reaching 6.5 by year-end. We anticipate an initial 27bp interest rate hike during this same time frame. These policy moves, which are expected to be modest and gradual, would supplement existing tightening measures including RRR hikes and credit controls. That said, the overall policy stance will remain growth supportive.

ENDS

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