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Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

(See attached file: AusNZ_weekly_7Dec07.pdf)

* Last week's RBA meeting delivered both the expected and the unexpected. The Board's decision to leave the cash rate unchanged at 6.75% was expected, but the announcement of the new communication regime was a big surprise. The RBA's decisions to release commentary even when policy is not changed and minutes of the Board meetings are welcome steps towards greater transparency. It means the hungry market now can attempt to digest RBA commentary at least every two weeks. Last week's Australian GDP data showed the economy still growing well above potential; this week's data should show another healthy gain in employment, and a rebound in the number of home loans in October.

* Across the Tasman, the RBNZ kept the official cash rate (OCR) steady at 8.25% last week, and took another swipe at the government's expansionary fiscal policy. The statement reinstated a mild tightening bias, with the upside risks to inflation clearly outweighing the downside risks to growth in key trading partners. Though the risk of another tightening in this prolonged cycle has risen slightly in the wake of the statement, JPMorgan maintains that the RBNZ will leave the OCR unchanged throughout 2008. Retail trade, out Thursday, will be this week's highlight and is likely to be down over the month. NZ house prices (released today) fell in November and will continue to buckle under the weight of higher interest rates and falling permanent migration.

* For the Federal Reserve, a 25bp easing in policy this week is likely to be accompanied by a 50bp cut in the discount rate. It is arguable whether this will have much effect in relieving stress in the interbank funding markets; at the least, it will be a relatively costless way to signal the FOMC's awareness of problems in the funding markets. The statement accompanying the decision will also likely be equivocal about risks, as the Fed steps away from its neutral balance assessment. While not signalling that an extended easing cycle lies ahead, the fragile state of the markets will prevent the Fed from talking down the likelihood of future eases. Most likely, one further rate cut from the Fed will be delivered in 1Q08.

* On the growth side, the US economy appears to be downshifting in line with the forecast of an expected 1% average GDP gain (q/q, saar) this quarter and next. It does not appear, however, that changes in US households and business behaviour are magnifying the deceleration. Consumption growth is sliding in response to tighter credit conditions and rising energy prices. But spending reports do not point to a move to build precautionary savings, a message expected to be supported by a solid November retail sales report. In part, this reflects the continued firm gains in jobs and labour income. Although labour demand has softened this year, weakness remains concentrated in housing-related sectors. The consistent message from the labour market, spending indicators, and business surveys is that firms are absorbing a profit margin squeeze without making substantial shifts to spending and hiring plans.


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