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J P Morgan: Aus. And NZ Weekly Prospects

J P Morgan: Aus. And NZ Weekly Prospects

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• The RBA’s commentary last week announcing the widely anticipated 25bp rise in the cash rate to 6.75% was hawkish. Officials indicated that core inflation will be above the RBA’s 2-3% target range in early 2008. This is the clearest signal yet that the RBA’s tightening cycle is not yet finished. We expect a further 25bp rate rise in February, but the risk of a December tightening has risen. That said, back to back rate hikes risk over-egging the policy pudding. An important milestone on the road to the next RBA decision is this week’s 3Q labour costs measure. The LPI probably increased by 1.1%q/q, which will take annual growth up to 4.2%, the fastest since 4Q 2005. Rising wage bills will add fuel to inflation’s fire, particularly with corporate pricing power so healthy.

• New Zealand’s housing market continued to soften in October, with both the QVNZ and REINZ reports showing increased days to sell and reduced activity. Labour market conditions to tightened in 3Q, despite a drop in employment. The drop in labour force participation and unemployment took the jobless rate to a new record low of 3.5%. The labour cost index rose a solid 0.9%q/q, which points to continued wage pressure from the tightening labour market. This week’s retail trade report for September will be the highlight, and is likely to show a small gain in sales.

• The global economy has entered a phase in which growth is set to slow materially below trend and consumer price inflation will reach a cyclical high. The US, Euro area, and Japanese economies are all decelerating into year end, and this quarter is expected to post global GDP growth of just 2.4%q/q, saar—the smallest gain in over four years. Meanwhile, faster increases in food and energy prices, along with a modest rise in core inflation, is expected to push global consumer price inflation to 3.3%oya, the highest level in more than a decade.

• These developments highlight a powerful underlying tension at work. On one side stand the sustained and broad-based demand engines of emerging market economies. The current debate about whether EM growth can decouple from the developed economies misses the point that growth and asset price divergence has been a feature of the global landscape for the past five years, when EM GDP growth has averaged 6.5% per annum, alongside developed world growth of 2.5%. Together with slowing potential growth in the developed economies and a sustained accommodative monetary policy stance, resource utilization rates have moved above previous cyclical peaks and commodity prices have moved inexorably higher.

• On the other side lie powerful drags on global growth coming from the disorderly repricing of credit risk and the lagged effects of a tightening in European monetary conditions. With credit tightening concentrated in the United States and interacting with a deep housing downturn, there is an uncomfortably high risk that the US economy will slide into recession. How the interaction of these two powerful forces plays out is key to the global outlook.


Stephen Walters
Chief Economist
J.P. Morgan Australia Limited

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