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JP Morgan: OZ and New Zealand - Weekly Prospects

JP Morgan: Australia and New Zealand - Weekly Prospects

- We expect the RBA to lift the cash rate another 25bp to 7% on Tuesday afternoon. The domestic case for another policy tightening has been clear for some time firms have little spare capacity, the unemployment rate is low, and core inflation is well above target. Last week's credit aggregates showing the fastest annual growth in since 1989 was icing on a bitter-tasting cake. That said, RBA officials have to weigh this against deteriorating conditions offshore; we believe last week's rate cut by the Fed makes a rate rise here more likely because the Fed's assertive action cushions the downside for Australia's trading partners. The data highlight this week will be retail sales on Tuesday; we expect a soft 0.4%m/m rise.

- In New Zealand, this week's labour force survey and labour cost index will provide key insights into the strength of the labour market, and the foundation for consumption growth. On the inflation front, the all-important labour cost index, out Tuesday, should rise to 3.3%oya, the highest level series the series began in 1994. Last week's trade balance bounced into surplus in December; supporting our view that the growth rotation away from households to exports is well under way. Building approvals continued to fall in December, though, signaling that the housing market is well into a prolonged downturn that is likely to last up to two years.

- With all eyes focused on whether the US economy is slipping into a recession, labour market indicators need to be placed at centre stage. Labour data are unique in providing high-frequency and detailed information on overall economic performance in an environment where sectoral dynamics vary widely. In addition, recessions are by nature events that trigger a pronounced move toward retrenchment by firms. In each past recession, this retrenchment was immediately visible across a wide range of labour market indicators. Thus, the drop in January payrolls, against the backdrop of a trend rise in unemployment, heightens concern that a recession may have begun.

- The US is not the only large economy at risk of falling into recession. Japan's small business survey fell to 43.5 in December, the lowest level since April 2002. We have relied on this survey to gauge the underlying growth trend through the ups and downs in the monthly data, and it has plunged since midyear. Consistent with this message, we cut our GDP growth estimates for 4Q07 and 1Q08 to just 0.5%q/q, saar. Although there has been much focus on consumer spending, the latest data point to a surprisingly good increase in household spending in 4Q07, in the order of 1-2%. Exports and stockbuilding also supported growth last quarter. Balancing these gains was a plunge in residential investment and, apparently, a drop in business equipment spending.


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