Australia And NZ Weekly Prospects - 17 Sep 2007

Australia and New Zealand - Weekly Prospects - September 17, 2007

Top-tier economic data was largely absent from the Australian calendar last week. Data did, however, show that demand for housing finance eased in July after spiking in the previous month, while consumer confidence rebounded in September in the wake of the RBA's decision to leave interest rates on hold. In the coming week, market pundits again will have little economic data to chew on, with only the Westpac-Melbourne Institute leading index for July and new passenger car sales for August currently scheduled for release. The highlight this week, therefore, probably will be Tuesday's speech by RBA Governor Glenn Stevens, which should touch on the recent problems in money and credit markets.

In New Zealand, the RBNZ left the cash rate unchanged at 8.25% as widely expected last Thursday, and signalled that interest rates will likely remain on hold for the foreseeable future. July's retail sales data, meanwhile, fell below expectations, suggesting that the weakness in domestic spending during 2Q has extended into the third quarter. Record high interest rates and a slowdown in net permanent immigration appear to be taking their toll on consumer spending. Other data released last week showed a bounce in house prices in August, a drop in the volume of home sales to a seven-year low, and a rise in the number of days to sell a home. This week's highlight will be the 2Q current account data on Thursday--the deficit probably will widen owing to a larger income imbalance.

The Federal Reserve is expected to lower its target rate this week, making it the first central bank to decide that financial conditions have tightened so much as to produce weak growth in the coming quarters. That the Fed is taking the lead is no surprise. A main source of the financial turmoil is the weakness of the US housing market-- a sectoral drag not present elsewhere. In addition, US real policy rates are high relative to those across most of the rest of the world. The main uncertainty regarding the Fed's decision is the size of the move. We believe that the Fed will lower the fed funds rate only 25bp but deliver a statement that maintains an easing bias. We forecast a total of 75bp of Fed easing by year-end.

Other major central banks are expected to take an extended pause in their tightening cycles. Central to our global forecast is the view that financial spill-overs from the US slowdown--to global equities and local credit markets--will remain limited, allowing global growth to proceed at a trend-like pace in the coming quarters. Recent financial market movements align with this view, but the problems that emerged for a UK mortgage lender last week are a reminder that it is too early to conclude that financial stresses will stay contained.

This week's highlight

RBA Governor Glenn Stevens' speech on Asia, Australia and Financial Markets on Tuesday. In a quiet week for economic data, any reference by the Governor to recent problems in financial markets will attract a lot of attention.

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ENDS

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