Australia and New Zealand Weekly Prospects

Australia and New Zealand Weekly Prospects

* Once again we have arrived at the quarterly fork in the road that is the Australian inflation data, and the 'will they, won't they' debate on the likely RBA response. A 0.7%q/q print on the core trimmed mean and weighted median statistical measures on Wednesday (which, for the first time, will be released simultaneously with the headline data) should be enough to keep the RBA sidelined next month. Headline inflation will be boosted to 0.9%q/q (from just 0.1% in Q1) by rising fuel and food prices, and higher rents and house purchase costs. The offset should come from lower import prices. It would take a core print of at least 0.8% to bring an August rate hike into play. Today's PPI data will be a tasty apertizer -[ the PPI has as good as nailed the CPI result for the last four quarters.

* Inflation remained at the centre of the economic radar in New Zealand last week. Although headline CPI came in above expectations in 2Q, markets centered their attention on the reading for nontradables inflation, which printed at an unexpectedly high 4.1%oya in the June quarter. After considering the inflation report, in addition to other key economic data that has printed on the firmer side, the forecast now anticipates that the RBNZ will raise the official cash rate by 25 basis points to a fresh record high of 8.25% on Thursday. Moreover, there is a growing risk of a second tightening in September.

* Recent financial market developments underscore the risk that an unexpected, sharp tightening in financial conditions has the potential to slow the global economy in coming months. Barring such a tightening, activity data are sending mostly positive signals about global growth prospects. The jury is still out on the strength of the US economy after what is expected to have been a solid second quarter. We remain comfortable with the view that, with the housing market downturn losing force and gasoline prices moving lower, the US economy will generate growth of 3% or better in coming quarters. Looking beyond the United States, the latest business surveys and the hard activity data from Europe and Asia point to continued above-trend growth. Likewise, rising commodity prices continue to support growth in the commodity-exporting emerging economies.

* The latest data from China deliver a strong message about its own and global growth. The 2Q quarterly advance in real GDP, estimated to be 15.9% (q/q, saar), was the strongest since the early 1990s, with the exception of the 3Q03 increase that followed the SARS crisis. China's growth is multifaceted, featuring huge increases in retail sales, fixed-asset investment, and exports. Moreover, the strength of the June activity indicators suggests that the economy has carried strong momentum into the current quarter.

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