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Australia and New Zealand - Weekly prospects

Australia and New Zealand - Weekly prospects

• In Australia, the RBA almost certainly will keep the cash rate unchanged at 6.75% on Wednesday. The deteriorating inflation outlook argues for a higher cash rate, but worsening credit conditions and signs of stress in the global economy argue for caution. The safest option, therefore, is for RBA officials to do nothing, at least for now. We still expect a policy tightening in February. A barrage of top-tier data hits Australia’s shores in the week ahead, including 3Q GDP, which likely will print at 1.0%q/q and a robust 4.7%oya. Meanwhile, Labor’s win in the November 24 federal election was widely expected, so markets took the change of government in their stride. Last week’s data showed that business investment fell and the current account deficit widened in 3Q, while private sector credit growth was solid in October.

• In New Zealand, the main event this week is the RBNZ’s quarterly monetary policy statement. The OCR is likely to be left unchanged at 8.25%, and the RBNZ will deliver a neutral commentary airing concerns about inflation risks, while acknowledging the downside risks to growth associated with the financial market turbulence and increasing fears of a US recession. Last week’s business confidence survey slipped over the month over November, and the cracks in New Zealand’s housing market widened, with building approvals taking another leg down in October. On a positive note, the trade report for October was positive, with oil and dairy inflated exports exceeding market expectations.

• Combining downward momentum with new drags, global growth is set to weaken further into year end. In the vanguard of slowing were the consumer spending indicators at the start of this quarter. In the three months through October, our global retail sales proxy produced its weakest outcome in over three years. The softening in consumer spending now taking hold will reinforce downward pressure on industrial activity. Although we are expecting our global PMI (released this week) to stabilize at a level consistent with about a 3% growth pace, global industrial output is expected to stagnate in the coming months as global demand slips below trend.

• Before the Fed meets on December 11, twelve other central bank meetings will take place. Three are particularly important. We look for the BoE and BoC each to ease rates 25bp this week, in the first salvo of what is expected to be a series of moves from these central banks through next year. The ECB, in contrast, appears to be firmly on hold even as risks increase to both growth and inflation. Over the last few weeks, money market stress has intensified and overall financial conditions have tightened further. The latest data delivered another leg down in the PMI in November along with dismal indications on consumer spending. At the same time, soaring energy and food prices boosted inflation to 3% in November, a full point above the top end of the ECB’s target zone.

See attached file: AusNZ_weekly_03Dec07.pdf

Jarrod Kerr Economist
J.P. Morgan Securities Australia Limited

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