Australia and NZ - Weekly Prospects - 2 July 07

Australia and New Zealand - Weekly Prospects

* Until late last week, major market-moving economic data remained absent from the Australian economic calendar. Private sector credit aggregates, one of two key indicators becoming available prior to this week's RBA meeting, came to hand on Friday, however, and printed on the upside of market expectations. The other vital data ahead of the monetary policy announcement will be May retail sales on Tuesday - anecdotes from retailers indicate that sales were very firm. The forecast is that the RBA will hike interest rates by 25bp this week, but the dominant risk is that the cautious RBA waits until August.

* Economic data in New Zealand flowed thick and fast last week as Statistics New Zealand reported two glamour stats - GDP and the current account. Real GDP posted a solid 1.0%q/q gain in 1Q, and the current account deficit improved markedly on a jump in export volumes. However, hairline fractures evident in the forward-looking indicators are widening under the pressure of higher interest rates. Consumer confidence dropped and business confidence was subdued after the last OCR hike - both point to reduced economic activity. The RBNZ will remain on alert as officials wait for the fall in confidence to translate into an easing of inflation pressure. This week is quiet on the data front, with ANZ commodity prices the highlight on Thursday. Next week's data, however, is critical to RBNZ's July decision.

* Across the globe the tone of central bank rhetoric continues to shift in a hawkish direction, as concerns about rising commodity prices and resource utilization become more uniform. It is important to recognize the difference between talk and action. With the Fed on the sidelines and the BoJ inching rates up, average global policy rates have risen a total of just 40bp so far this year. But the broad shift in tone should not be dismissed, as it speaks to the risks ahead.

* In Japan, news last week that IP fell in May adds another cloud to the growth outlook. While domestic final demand remains on an uptrend - as seen in the consumer spending indicators and core capital goods shipments - exports are on track to decline in 2Q along with the pace of inventory accumulation. Thus, the risks to our 2%q/q, saar GDP growth estimate are skewed to the downside. We maintain our call that the Bank will hike rates in August, based on the fact that the BoJ has been willing to look through short-term ups and downs in momentum so long as the underlying trajectory remains firm. Important markers between now and then will be the BoJ's Tankan survey today, the June IP report, and Governor Fukui's press conference in July.

ENDS

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