Australia and New Zealand - Weekly prospects

Australia and New Zealand - Weekly prospects

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• Recent RBA commentary has implied that RBA Board members want to get the official cash rate back to a “normal” level relatively quickly. We suspect that this near-term “target” is 4.5%, only 25bp above the current level of the cash rate. Indeed, the minutes from the RBA’s April Board meeting released last week suggest that the RBA is not yet done raising interest rates, but the precise timing of future rate moves remains hard to pick. The March quarter CPI numbers this week are key ahead of the May rate decision. Headline and core inflation, on our forecast, will have remained stuck at the top end of the RBA’s 1%-3% target range. The RBA may be relaxed about the inflation outlook for now, but the medium term inflation outlook is a concern—the economy is expanding with what appears to be limited spare capacity, signs of wage inflation are emerging, and the rising terms of trade is set to provide a massive boost to national income this year The case for returning policy to neutral remains strong; hence, we maintain our call for a further 25bp rate hike to be delivered in May.

• The highlight in New Zealand this week is, of course, the RBNZ decision. The official cash rate (OCR) will likely be left unchanged, but the commentary accompanying the decision will be of particular interest. We suspect that Governor Bollard will step away from the current policy guidance suggesting that the policy stimulus in place may be removed “around the middle of 2010.” Indeed, the inflation data last week (which printed below our and market expectations), combined with a slew of other disappointing economic data, provide more scope for the RBNZ to sit on the policy sidelines in the near-term. With non-tradable inflation likely to have troughed, however, at an elevated level, the RBNZ will be wary of leaving the cash rate too low for too long. This is particularly true given that our forecasts suggest that headline inflation will print consistently above the RBNZ’s 1%-3% target range in 2011. We continue to look for the first OCR hike in July.

• Capital spending is generally one of the last components of demand to recover during a global economic upturn. However, a coincident turn in growth and capital spending is now under way. High-frequency indicators from the largest capital goods producers suggest that demand for capital equipment accelerated dramatically during the first four months of this year. Shipments from the US, Germany, and Japan—which closely track global investment spending—rose at a more than 20% annualized rate last quarter. It now looks likely that global capital spending will rise at a double-digit pace over the course of 2010—an outcome that could prove as strong as any over the past quarter century.

• Growing market concerns that the Greek fiscal crisis is quickly morphing into a solvency crisis (or was one all along) were fed last week by Eurostat’s upward revision of the Greek 2009 fiscal deficit from 127% of GDP to 13.6%. The medium-term challenge of Greece achieving debt sustainability remains daunting, and this is increasingly spooking markets. For the region as whole, though, we maintain that the powerful cyclical lifts springing from a decisive shift away from retrenchment toward expansion will dominate the structural, fiscal, and delevering drags.

ENDS

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