Australia and NZ - Weekly Prospects 13 Oct 08

Australia and New Zealand - Weekly Prospects

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• The 100bp rate cut delivered by the RBA last week was twice market expectations and signalled that officials want to stay well ahead of developments in financial markets and the real economy. The rate cut was all about getting mortgage rates down. We expect another 50bp cut in early November, and a cash rate of 4.5% by mid-2009. The Government announced over the weekend that it will guarantee deposits at banks, building societies and credit unions, and wholesale term funding issued by banks and other deposit taking institutions. The Government also will double the public funds committed to purchasing RMBS to A$8 billion. We have lowered the forecast for growth in Australia’s economy for 2009 to just 1.8% (from 2.5%); we now expect virtually no growth in household spending in 2009. The risks are to the downside.

• The RBNZ surprisingly left the official cash rate (OCR) unchanged last week even though other central banks across the globe were easing policy. Following news of coordinated rate action among central banks, we thought the RBNZ might deliver an inter-meeting rate cut, especially given that the economy (already in recession) is battling more headwinds than most. Retail sales data today unexpectedly rose 0.4%m/m in August, but there is pain for households ahead. The household sector remains under significant pressure from still-high interest rates, alongside elevated food and energy prices, and the rapidly deteriorating housing market.

• The global financial crisis has risen to a fever pitch. Despite a coordinated easing in global monetary policy, unsecured funding markets are experiencing intensified stress. US commercial paper outstanding contracted and interbank lending rates rose further across the board. The 3-mth USD LIBOR/OIS spread widened out to a record 364bp. Emerging market corporate financing is now under significant pressure, with our index of EM corporate overseas borrowing rates up more than 300bp in less than four weeks. Adding significant insult to the injury already being inflicted on credit markets, global equities fell about 20% last week and are down over 40% for the year.

• The outlook for the emerging economies is dimming rapidly. The continued slide in the G3 economies is taking an increasing toll on EM exports and industrial production. In addition, the associated collapse in investor risk appetite has produced a sharp decline in the prices of EM financial assets and a drying up of dollar funding, which is feeding back negatively on domestic demand. In response, we have made a succession of forecast downgrades that put EM growth at 4% over the four quarters ending 2Q09—2% points below our estimate of trend.

• We still expect a large fiscal stimulus from China in the form of tax cuts and spending on infrastructure, as well as monetary policy easing via cuts in interest rates and the RRR. Additional and more widespread easing also is on the way in the rest of EM Asia, where recent data are menacingly bad. Bellwether Taiwan’s exports collapsed in September.

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