Australia and NZ - Weekly Prospects 05/05/08
Australia and New Zealand - Weekly Prospects
* Australian economic data last week reaffirmed our expectation that the RBA will leave the cash rate steady on Tuesday. Credit growth fell below 15%oya for the first time since May 2008 and retail sales ex-food declined, adding to recent signs that the domestic economy is losing momentum. This means that officials will probably look through the recent spike in CPI which saw both headline and core measures of CPI surge above 4%oya in 1Q, well above the RBA's 2-3% target range. The rise in commercial banks' mortgage interest rates is doing some of the heavy lifting for the RBA. Labour market conditions remain tight, however, and this week's employment print probably will show further healthy job gains for April.
* In New Zealand last week, the NBNZ business confidence survey showed that business sentiment improved slightly in April, and firms' own activity expectations rose, but remained in negative territory. Owing to fewer exports, the trade balance unexpectedly fell into deficit in March, bucking expectations for a surplus. New Zealand will release labour market statistics this week. This morning, data showed wage growth slowed to 0.7%q/q in 1Q. On Thursday, the job print should show that the unemployment rate rose from 3.4% in 4Q to 3.6% in the March quarter.
* Led by the Federal Reserve, central banks continue to move on two fronts to shield the macroeconomy from credit stress. With easings last month by the Fed, the BoC, and the BoE, developed world policy rates are now down a cumulative 137bp on average since last August. These actions have been complemented by significant steps to alleviate funding pressures in the banking system. Funding pressures remain an issue but the tone in financial markets has improved as central banks signal their firm commitment to maintain functioning markets and as troubled financial institutions make progress in raising capital. It is encouraging to see the narrowing of credit spreads, active corporate issuance, and the continued expansion in bank loans to better quality credits. Tight credit conditions will be a persistent drag, but fears of a wholesale disruption in credit intermediation look unlikely to materialize.
* On the data front, the US indicator flow highlights both elements of our outlook theme. Following a modest gain last quarter, drags from the construction sector and weak consumer spending look to be intensifying. However, the first readings from firms in April (ISM, payrolls) do not suggest that drags are intensifying or broadening. The economy is unlikely to fall into a hole so deep that it will contract despite the infusion of tax rebates. We continue to see GDP growth in slightly positive territory in the middle two quarters of the year as the boost from rebates offsets a mild recession dynamic. The Fed signaled last week that it will remain patient through this type of economic environment and is likely to hold the funds rate at 2% for some time to come.