Australia and NZ - Weekly Prospects 12/05/08

Australia and New Zealand - Weekly Prospects

* In Australia, the RBA left the cash rate steady last week, and signalled that a significant slowing in the pace of growth in domestic demand would be required to dampen inflation. The RBA highlighted, though, in its quarterly Statement on Monetary Policy on Friday, that the rise in the terms of trade has been much more than expected, and will act as an opposing force on domestic demand. Given the fiscal stimulus in the pipeline, and data last week showing that solid job gains were recorded in April, the dominant risk is that a significant easing in domestic demand may fail to eventuate. The chances of another rate hike this year, therefore, have risen. Tight labour market conditions mean that the labour price index this week should show wage growth accelerating in 1Q.

* In New Zealand, labour market statistics last week showed that wage growth slowed in 1Q and the jobless rate edged higher. The loosening in the labour market means that consumer spending will remain subdued near term; this should be confirmed by March retail sales data scheduled for release on Thursday, which should show a 0.3%m/m decline. Other economic data should show that growth in producer input prices rose in 1Q, while growth in output prices eased. Despite the significant price pressures in the pipeline, in a change of forecast, we now expect the RBNZ to cut the OCR by a total of 50bp in 4Q, and by another 25bp in 1Q.

* A key to JPMorgan's US forecast—that growth stagnates in the coming months before lifting into 2009—is that credit creation and rebate checks provide the stitch in time that averts a consumer retrenchment through a period of cutbacks in business spending and hiring. While indicators suggest that this view is tracking, the drag from rising energy prices continues to build. This week's report will provide important new information on this front. If we are right, the fabric of the forecast will remain intact, as April core sales were stable despite sharp declines in housing starts and manufacturing output.

* Along with stagnation in the US, growth elsewhere is expected to slow sharply in the coming months. While 1Q08 GDP reports are likely to post about 2% growth for the Euro area and Japan, both economies already show signs that a phase of subpar growth lies ahead. In Japan, a range of key activity indicators lost momentum in March, and the main business surveys stepped down sharply in April. Japan's manufacturing output also is sliding. Euro area data are tracking in a similar way. In particular, IP reports from Germany and France raised conviction in our forecast that the growth of Euro area industrial activity will stall in 1Q.

* China releases its key April indicators this week. The focus will be on the inflation report. PBoC Governor Zhou last week suggested inflation would likely ease moderately in 2Q, though he also warned that the inflation outlook for the rest of the year remained unclear because of the continued strength of commodity prices. Indeed, producer price inflation rose to 8.1%oya in April, raising concerns that, even as food prices ease, the inflation of nonfood prices may be on the verge of picking up.

See... AusNZ_weekly_12May08.pdf

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