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Australia and NZ - Weekly Prospects, 11 Feb 08

Australia and New Zealand - Weekly Prospects

(See attached file: AusNZ_weekly_11feb08.pdf)

* Monday's quarterly statement from the RBA is a key signpost for determining if, and by how much, the RBA raises the cash rate in coming months. Our forecast is that the RBA is on hold, mainly because of the weakness offshore, but the dominant risk is that the RBA raises the cash rate again. The treatment of the RBA's inflation forecast on Monday is the key; we expect the 2008 forecasts to be raised, most likely to 3.5% for H1, from the current 3.25%, and to 3.25% for H2, from 3.0%. The RBA's 2009 forecast also may rise. In isolation, this will indicate there is a compelling case for further tightening, but the weakness in Australia's trading partners argues for caution. The December home loans data and January's labour force report also will attract market attention. We expect a fall in home loans and only modest job growth.

* In New Zealand, the December retail sales data (Friday) will show good momentum over the end-year shopping period, and illustrate that consumers are still willing to load up on debt to consume. Today's QVNZ report confirmed further weakness in the housing market. Last week's labour force survey recorded a surge in female full-time employment growth in 4Q. The unemployment rate dropped to the lowest level in the 20-year history of the survey. The labour cost report showed a sharp acceleration in wages growth, reflecting the already tight labour market.

* With the global economy on a razor's edge, it is critical to determine whether the weak performance of the US and global economies at the start of the year represents the onset of recession. In this regard, the abrupt January slide in global non-manufacturing business surveys suggests that firms have started to retrench. The US non-manufacturing ISM collapsed to its second lowest level in its ten-year history, led by a record-low reading on employment. But while not ignoring this message, we hesitate to put significant weight on this survey by itself, given its short history and its potential for being unduly influenced by developments in finance and real estate. If an abrupt deterioration in business activity is in train, it is odd that it was not also reflected in the manufacturing surveys for January. Equally important, key January labour market data—in the US and elsewhere—have not displayed the type of deterioration normally evident as a recession starts.

* With the growth slowdown broadening, the easing process is likely to gather steam in the coming months. Alongside additional easing from the central banks of the English-speaking countries that have moved so far, the ECB now looks set to start lowering policy rates before midyear. President Trichet expressed increased concern about growth in last week's press conference. We now think the ECB will cut rates in the next few months in response to evidence that the US economy has stalled and domestic growth is falling well short of trend. The ECB will most likely adopt an easing bias at the next press conference in March, paving the way for a rate cut in April.


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