Cautious RBA now likely to be on hold until April

Cautious RBA now likely to be on hold until April

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• The RBA surprised just about everyone last week by leaving the rate steady at 3.75% despite, judging by the upbeat accompanying statement, officials being confident the economy is in great shape. Board members apparently feel they had insufficient information about how households were coping with the three rate hikes delivered in 2009, so held fire. We think they will sit on the sidelines until at least April as they gather more information on the strength of the global economy and markets, and test the all-important resilience of consumers. If officials were unclear last week, they are unlikely to be significantly better informed in three weeks’ time. Board decisions from here will be data-dependent, with the consumer and labour market indicators the most significant potential bell-ringers. This week, they probably will fail to back the RBA’s policy inaction. Consumer confidence, for example, will hit a record high on the back of the RBA’s reprieve, while the employment data should endorse the perception that the jobless rate has peaked.

• We suspect, following the labour market data in New Zealand last week, that we have seen the low point in the Kiwi employment cycle. With business confidence firming, hiring intentions increasing, and wage growth poised to accelerate, the labour market should tighten in 2010. This is another reason we believe the RBNZ will become increasingly concerned with the medium-term inflation outlook. The RBNZ Governor last week appeared comfortable with the medium-term inflation outlook. With wages to rise, however, domestic prices on the up, and excess capacity diminishing, this comfort will dissipate. Retail sales numbers this week will provide further evidence that the domestic economy is gathering momentum.

• Rising from the ashes of a severe financial crisis and deep recession, global GDP is on track to deliver a third consecutive above-trend increase this quarter. The bounce in global manufacturing has been particularly pronounced with the strongest two-quarter gain in over 40 years on record and January surveys moving higher. However, the key outlook question remains unanswered: Is a broad and self-sustaining expansion being established? Even as global growth looks to be proceeding at a solid pace, the latest news highlights the material political and economic risks that remain in place.

• Job creation is central to self-sustaining US growth, and the news from January indicators was decidedly mixed. Payrolls continued to decline last month, and the rise in initial jobless claims into month-end is a key concern. However, the details of the employment report show that although firms may not be creating jobs, output growth is now benefiting those households that are employed. Hours worked has been rising since last summer, and the payroll proxy of labour income for all employees (including supervisors) grew at a healthy 4.2% annualized pace over the past three months. The current quarter is on track to deliver a significant slowing in productivity that reflects an important behavioural shift from retrenchment by firms.

ENDS

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