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Australia and NZ - Weekly Prospects 25 March 08

See... AusNZ_weekly_25mar08.pdf

* In Australia, we leave behind a very quiet week for economic data and enter one that is even quieter. The main message from last week's RBA Board minutes is that the focus of RBA officials remains clearly on inflation, which makes us feel comfortable about our call for a 25bp rate hike on May 6. Given the dire domestic inflation outlook, the only developments that could keep the RBA sidelined in May will be offshore—further dysfunction in credit markets or a sharp leg down in the data prints for Australia's major trading partner economies. This week's Aussie economic calendar is virtually barren, except for job vacancies data on Thursday, so investors' focus probably will remain on the stresses in the global banking system and the responses by central banks.

* While there was no major economic data in New Zealand to report last week, the week ahead sees the release of 4Q GDP and current account data, and the February trade report. The 4Q GDP print will be the highlight, and should show that economic growth accelerated to 0.6%q/q from 0.5% in 3Q, owing mainly to faster export growth. Export growth has picked up due to greater shipments of milk powder, butter and cheese, and petroleum products, mainly because of production from the new Tui oil field. Other data should show that the current account narrowed in 4Q, and the trade balance returned to a small surplus in February.

* The Fed has been moving on two related fronts since the start of the financial crisis. First, it has been calibrating its policy stance to offset tighter credit conditions as well as signs of weakening labour markets and consumer demand. Accordingly, indicators suggesting that the US economy slipped into recession at the start of the year have been accompanied by aggressive ease. Most recently, rates were cut 75bp, bringing the real fed funds rate to zero. The FOMC also provided guidance that it is likely to ease again in April. Together with the fiscal stimulus that is in the pipeline—roughly US$100 billion in rebate checks will be mailed during May and June—the case for a rebound in 2H growth is getting stronger. Key to the realization of this forecast will be more effective transmission of stimulative policy to financial conditions. In this regard, USD's steady decline is supportive, particularly alongside recent news that US conforming mortgage rates have moved lower and that equity prices are rising.

* JPMorgan's economic forecast calls for global GDP growth to downshift sharply to just 1.7%q/q, saar this quarter. Although the slowdown is expected to be widespread, it is the weakness in the developed economies, and especially the US, that stands out. While the broad contours of this story appear to be playing to script, in tracking this forecast, the available data suggest that global growth is doing a bit better than anticipated. In the US, our real-time estimate of current-quarter GDP growth is running close to 1% point above our forecast of a flat quarter. Our expectation is that momentum will slow through the quarter, a view that can be gauged with this week's February releases for durable goods and personal income.


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