Australia And Nz - Weekly Prospects, Oct 08, 2007

Australia and NZ - Weekly Prospects, Oct 08, 2007

A string of top-tier economic indicators came to hand in Australia last week. While the RBA left interest rates unchanged on Wednesday, data for August showed that retail sales surprised on the upside, the trade deficit widened considerably on the back of stronger imports, and building approvals edged mildly lower.

This week is expected to further highlight the persistent strength of the domestic economy, with consumer confidence and employment numbers scheduled for release. Home loan approvals are also expected to rebound in August, despite the rise in interest rates earlier in the month.

In New Zealand, the QVNZ housing report released early this morning confirmed the weakness seen in the REINZ reports, and points to a housing market that is deteriorating. There are two key economic data releases out this week--the NZIER QSBO 3Q survey and retail trade.

The QSBO survey is the more important of the two, and is likely to show a marginal improvement in confidence, and confirm that the economy remains stretched. August retail trade numbers should post a modest rise after flagging in recent months.

The only economic series of interest out last week was the ANZ commodity price index, which rose 1.5%m/m in September, slowing steeply from a 10.0% increase in the previous month, owing to a sharp moderation in growth in dairy prices.

We are comfortable with our view that the Fed's September move is not likely the start of an extended easing cycle. Having acted effectively to calm markets and forestall downside risk, it is less clear whether the FOMC will even add the final 25bp dose of insurance included in our forecast.

Expectations are that upcoming indicators on housing will be weak, and the October Senior Loan Officers Survey will show further tightening in lending standards. Although this will provide impetus for another ease, it is unlikely that the Fed will move if the broader message from economic data and financial markets continues to signal that the housing downturn remains sectoral in nature.

The Euro area economy certainly faces increased headwinds in coming months. The term structure of interest rates beyond the very near term is at a level consistent with a policy rate between 4.5% and 4.75%.

As indicated by the ECB bank lending survey last week, banks are responding to the pressures they feel from funding costs, asset price markdowns, and unwanted developments in their balance sheets by tightening up their lending standards. This will restrict the availability of credit to households and corporates.

Also, the currency has appreciated and oil prices have moved to an elevated level even in euro terms.

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ENDS

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