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Australia and NZ - Weekly Prospects 07.12.09

Australia and New Zealand - Weekly Prospects

Click here for the full Note and disclosures.

Unsurprisingly, the RBA last week delivered another 25bp rate hike, the third in as many months. The surprise came after the RBA announcement, when the major banks took divergent paths on their lending rates—all but one of the “Big Four” upscaled the move, with the average rise in the variable home loan rate a chunky 36bp. Clearly, this means the commercial banks are doing some of the heavy lifting for the RBA. We still believe, though, that the next tightening will occur after the next Board meeting in February, and that there will be a series of quarter point hikes throughout 2010; the cash rate will be 5% by this time next year. The domestic data flow picks up this week, with employment, home loans, and consumer and business confidence numbers on the agenda, each of which should post a fall The final piece of the GDP jigsaw, the current account data, will be released tomorrow. Our preliminary 3Q GDP forecast is that the economy expanded just over 1.0%q/q, up from the 0.6% gain in 2Q. RBA Governor Stevens’ speech Tuesday night should be the highlight of the week ahead, assuming the Governor drops hints on how quickly the remaining policy accommodation will be withdrawn.

The forecast is that the RBNZ this week will leave the cash rate steady at 2.5% and maintain the neutral bias installed at the last announcement; the commentary will indicate that the OCR will remain at current levels until the second half of 2010. The recovery in New Zealand remains fragile. Housing market activity and household spending have picked up, but business spending remains weak, retail sales have been flat, unemployment is still rising, and wage growth has eased. Meanwhile, high NZD is weighing on exports, company profits, and income, and annual CPI inflation should track comfortably within the RBNZ’s target 1%-3%oya range until early 2011. We forecast that the RBNZ will remain on the policy sidelines until mid-2010.

The biggest risk to our forecast of synchronized above-trend global growth in 2010 is the prospect of an incomplete adjustment by US firms as they transition from retrenchment to expansion. The foundation for job creation and capital spending gains has already been laid by a dramatic shedding of costs, a recovery in earnings, and an improvement in financial conditions. History suggests that this turn should come soon and could prove powerful. Despite disappointments in the October data flow, we have maintained our confidence in this framework as our most trusted high-frequency indicator (initial jobless claims) has suggested that US job shedding is nearly over.

• In all, concern about downside risks has declined significantly, and confidence that we are applying the appropriate cyclical framework for tracking the global expansion has increased. While not prompting any change in forecast at this time, we believe that recent events have increased upside growth risks. Even a modest further slide in US claims would provide sufficient evidence that US growth is set to run faster than we are forecasting.

• We are not expecting rate hikes from most developed market central banks for some time. However, there are a number of developments to track with regard to unconventional policies. Last week, for example, the BoJ reversed its exit course and implemented a new QE measure, a three-month, 0.1% fixed-rate fund-supply operation totaling ¥10 trillion.


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