Australia and NZ - Weekly Prospects 25 Sept 07

See... AusNZ_weekly_210907.pdf

* RBA Governor Glenn Stevens provided last week's highlight with a punchy speech indicating that Australia's economy remains robust, despite financial market troubles, and that further restraint "perhaps would not be unwelcome". Whether this restraint is provided by credit market tightening, or via the policy rate, remains open for debate. The rise in market interest rates to unusually elevated levels relative to cash has delivered a defacto tightening, but the Governor's unexpectedly upbeat speech suggests further policy rate tightening cannot be ruled out. This week brings the August credit aggregates, which should show that credit growth returned to normal levels, following the superannuation fund, policy-induced bounce in June, and the inevitable correction in July.

* The 2Q GDP report will be the highlight in New Zealand. Growth will likely print at 0.4%q/q, keeping the annual rate of growth below potential at 2.5%. RBNZ officials are unlikely to be alarmed by the result because they already have lowered their 2Q forecast to 0.5%q/q (previously 0.8%), and remain focussed on the upside risks to inflation next year. Last week, the current account deficit widened in 2Q but, thanks to substantial revisions to the back data, the deficit improved sharply as a percentage of GDP. In other data, confidence in the rural sector rose sharply, buoyed by NZD's decline, and a sharp rebound in electronic card transactions in August points to a bounce in retail spending.

* In delivering a 50bp rate cut last week, the FOMC sent two messages. First, it expressed growing concern about the life of the US expansion against the backdrop of tightening credit conditions, declining housing prices, and a weak August payroll report. Second, it signaled a commitment to act preemptively to offset these risks. It was this second message that was most clearly heard by markets in a week in which US equity prices bounced, credit spreads narrowed, and stress in US money markets was relieved.

* These developments bolster confidence that the US can avoid a black hole scenario. There is, however, a pothole around the bend for the global economy. Further declines in housing will be accompanied by softer consumer durable spending in the US. Moreover, the September flash PMI for services points to a downshift in Euro area growth. Adding insult to injury, the recent rise in global energy prices poses the biggest threat to household purchasing power in these same regions.

* With North American and Western European growth set to slow below a 2% pace in the coming two quarters, it looks likely that further monetary easing will be required. We expect a further 25bp cut from the Fed in October, to be followed by easing from the BoC and the BoE. Risks are rising that the ECB, which has only recently suspended its tightening march, may need to follow suit.

ENDS

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