Australia and NZ - Weekly Prospects 27/04/09

Australia and New Zealand - Weekly Prospects

• Inflation data in Australia last week will fail to set alarm bells off at the RBA. Minutes from the Board's April 7 meeting signalled that RBA officials are in no hurry to ease policy further - just yet. Further policy easing is expected, however. We forecast that the RBA's easing cycle will terminate at a cash rate of 2.5% in 4Q, with two 25bp cuts to be delivered between now and the end of the year. It is particularly difficult to see the RBA "sitting on its hands" as the unemployment rate rockets higher in 2H09. Data this week should show that credit demand remained subdued in March, as business lending contracted and precautionary saving rose.

• The data flow picks up in New Zealand this week, with the release of business confidence and trade data. The highlight will be the RBNZ's official cash rate announcement Thursday. Our call is for Governor Alan Bollard to deliver a 50bp cut to the OCR. Even though we believe that economic conditions warrant a larger move, Dr. Bollard has made clear his desire to maintain the cash rate at a level attractive to offshore investors so New Zealand can continue funding its massive current account gap. In our view, the risk of a 25bp move recently has diminished, given that monetary conditions have tightened.

• Just as last year's financial crisis brought the global economy to its knees, this year's synchronized economic recovery is likely to spur financial-market healing. The signs that the global economy is on track to move out of recession are accumulating. This improvement is, in turn, calming fears and promoting a positive feedback loop between economic fundamentals and credit and equity markets. As a result, the risk profile around our current forecast of a subdued 2H09 recovery is shifting to the upside.

• Consistent with the notion that firms have gained traction in their adjustments, manufacturing surveys are rising everywhere, alongside a synchronized movement upward in orders/inventory ratios. The April release of key business surveys this week - the J.P.Morgan global PMI, the US ISM, and Japan's Shoko Chukin survey - should reinforce this message. Evidence that a rebound in exports and tech activity is under way in Emerging Asia has, in the past, been an important early signal that a global upturn lies ahead.

• We are encouraged by the latest news confirming a firmer tone from global consumers and the steady announcements of additional policy easing across the globe. At present, these developments are consistent with our forecast that demand conditions will improve only gradually, as business adjustments linger and still-tight financial conditions weigh on spending. However, experience shows that swings in demand can surprise in an environment in which they are synchronized globally and generate positive financial-market feedback. With interest-sensitive spending levels very low, there is powerful fuel for a bounce if this fire can be lit with a financial-sector spark.

See... Weekly270409.pdf

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