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Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The RBA delivered on market expectations for a 25bp rate hike last week. The more balanced tone of the commentary reinforced our view that the RBA will remove the “emergency” component of policy accommodation gradually. Indeed, last week’s soft Aussie retail sales report, and unexpectedly weak data offshore, suggest there is a material chance of the RBA pausing in December. This week sees important pointers for the December decision. The employment print Thursday, for example, if unexpectedly soft, could be enough to trigger a pause, particularly if the consumer and business confidence readings also soften, as we expect. The fact that the Government finally has started pulling back on the fiscal stimulus slightly increases the odds of an RBA pause in December; belatedly, the two main arms of policy are pulling in the same direction.

• In contrast, the RBNZ will not begin policy tightening until mid-2010. Governor Bollard last week highlighted important distinctions between the New Zealand and Australian economies, including Australia’s imminent investment boom and likely terms of trade improvement. According to Bollard, financial markets do not appreciate the key differences between the two economies, so punters run the risk of “eventually losing money.” The highlight this week will be the retail sales numbers Wednesday. Retail sales values probably fell 0.4%m/m in September, largely a payback for the jump in sales in the previous month. Underlying sales growth should remain quite firm, buoyed by positive net migration flows and the recent pickup in housing market activity. The 3Q retail volumes data are important for our GDP forecast—we expect retail sales ex-inflation to have fallen 0.2%q/q, after a 0.4% gain in 2Q.

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• A simple statement of our US economic view is that we will get more growth than is expected but far less than is needed. While we forecast GDP growth to average 3.5% between now and the end of 2010, our projections place the unemployment rate above 9.5% at the end of next year and the fiscal deficit above $1 trillion dollars in 2011. Even as we cruise at an above-trend pace, the path ahead will send a sobering message about the chronic costs of the healing process and the enormous challenges facing policymakers. The issue at hand, of course, is how well growth momentum will be maintained into year-end. The most reliable US high frequency activity indicators—ISM, jobless claims, and auto sales—each posted encouraging readings last month. However, the US employment report was disappointing and left a number of unanswered questions in its wake.

• Although the formal announcement of the liquidity provision for next year will be made at next month’s meeting, ECB President Trichet signaled that the central bank was ready to start exiting from some of its nonstandard measures. Meanwhile, after acting aggressively earlier this year, the BoE’s decision to expand QE by only £25 billion likely signals that the expansion of its balance sheet will end early next year. These decisions were taken in the context of an improving economic environment.

ENDS

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