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Australia and NZ - Weekly Prospects 16 June 08

Australia and New Zealand - Weekly Prospects

• A string of weak data was released in Australia last week, suggesting that domestic demand is moderating quickly. The number of home loans fell, employment unexpectedly contracted, and consumer confidence slumped. RBA Governor Glenn Stevens, though, speaking on economic conditions on Friday, offered few surprises. Attention now is focused on the minutes from the Board's June policy meeting to be released Tuesday. The minutes probably will show that Board members acknowledged that inflation is uncomfortably high and will stay elevated for an extended period, but there also will be reference to the "opposing forces" at work in the economy—domestic demand has cooled amid tighter credit conditions and higher interest rates, but this is being offset to some extent by the impact of the soaring terms of trade.

• In New Zealand, ahead of a quiet week on the economic front, data on Friday showed that retail sales growth surged in April, though the trend remained flat. Strong auto sales and rising goods prices lifted the headline sales number, which is reported in value, rather than volume, terms. Record high interest rates, elevated food and energy prices, a rapidly deteriorating housing market, and drought conditions in key dairy producing regions will continue to curb consumer spending in coming months.

• The shift in global interest rates in recent weeks is remarkable against the backdrop of current economic conditions. The global economy delivered trend-like growth during 1Q08, but the broad thrust of data points to a downshift this quarter. JPMorgan forecasts that global GDP growth is slipping below trend and will remain subpar until early next year. Despite this news, markets have moved to price in sustained tightening by central banks. It is easy to look at rising oil prices as the main factor behind this dichotomy. It would be a mistake, however, to lose sight of the more fundamental shift in central bank behaviour taking hold. Indeed, JPMorgan expects a significant adjustment in monetary policy over the coming 18 months, even as global growth remains sluggish, oil prices fall, and headline inflation rates begin moving lower later this year.

• The tension between inflation and growth risk is most acute in the United Kingdom. The inflation news continues to worsen, as evidenced by the surge in the May PPI, the unprecedented jump in the Bank of England's survey of short-run household inflation expectations, and the continued climb in medium-term inflation expectations in inflation-linked markets. This week's reports are expected to show that May CPI inflation topped 3%, forcing BoE Governor King to write an explanatory letter to the Chancellor. At the same time, business surveys suggest that 2Q GDP growth is tracking at a below 1% pace, and housing-related data are extremely weak. A solid gain in May retail sales (expected this week) should serve as a reminder that consumer spending, along with labour market indicators, continue to hold up.

See... AusNZ_weekly_16June08.pdf

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