Australian & New Zealand rates strategy

The Antipodean Strategist

J.P. Morgan interest rate strategist, Sally Auld, provides a weekly Australian & New Zealand rates strategy update:

• Recent data have done nothing to argue the case for a June rate hike. Without exception, the data (retail sales, employment, housing finance, car sales, consumer confidence and wages) have printed on the softer side of expectations. While the numbers might not be weak enough to get the RBA to question its core view of the economy just yet, they nullify any urgency to the rate hike cycle.

• At the very minimum, recent data buy the RBA some time to further assess the economy. While the RBA’s own growth and inflation forecasts make clear the need for a rate hike, we think the 2011 growth forecasts are too high. 4.25% growth as at December 2011 looks ambitious, particularly given the likelihood of a negative print for Q1.

• Internationally, key risk factors remain Greece, the US fiscal outlook and debt ceiling and China. For Australia, it is the latter that matters most. A clear determination by the Chinese to get on top of a seemingly accelerating inflation problem will require further tightening and potentially, slower growth. The RBA could live happily with 8% growth in China, but perhaps not with Chinese growth much lower.

• In our view, risks are biased towards a more modest growth outcome this year than encapsulated in the RBA’s own forecasts, meaning that the inflation story isn’t yet as pressing as current official forecasts might imply. On this view, we like buying Dec-11 bank bills sub 94.80.

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