Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• After a virtual hiatus last week, the Aussie event calendar comes back to life this week with important releases on inflation and the release of minutes from the RBA’s July Board meeting. Headline inflation probably accelerated to 0.7%q/q (consensus 0.5%) in the June quarter, with much of the rise owing to a bounce in petrol prices. Core inflation, though, should have eased a notch to 0.9%q/q (consensus 0.7%). With abundant domestic economic slack, inflation pressures should ease in coming quarters, although the core measures will be sticky. This probably will be an irritant for RBA officials; after all, inflation is never on the back-burner for an inflation-targeting central bank. The Board minutes are unlikely to deliver revelations; RBA commentary in recent weeks has been unsurprising, but Governor Glenn Stevens’ speech next week looms large as a policy milestone.

• Antipodean economic action was centred in New Zealand last week. Retail sales, particularly ex-autos, and the consumer price data printed on the upside of market expectations. New Zealand’s core CPI measure accelerated in 2Q, reaffirming our view that a similar scenario will play out in Australia this week. With nontradable inflation, in particular, likely to hover at the upper end of the RBNZ’s target range in the foreseeable future, we see little scope for the RBNZ to ease policy further. In fact, we expect the RBNZ to begin tightening in July 2010.

• Incoming releases continue to support our view that the Americas and Europe are set to join an already established Asian economic upturn this quarter. While the recognition that a recovery is coming has increased, the sharpness of this quarter’s growth swing should surprise. After declining at a nearly 10% annualized pace in each region last quarter, industrial production is expected to rise close to 10% in the Americas and 5% in Western Europe this quarter. GDP gains should be close to trend in both regions.

• Accompanying this bounce, US labour market and housing indicators should turn materially better. Although a component of the recent collapse in jobless claims reflects noise related to auto factory shutdowns, initial claims are expected to fall below 500,000 this quarter, signaling a moderation in job shedding toward a roughly 150,000 monthly pace. Behind the downshift in jobless claims is a broader move away from retrenchment by businesses, which should dominate incoming economic indicators and provide a catalyst for stabilizing labour income, lifting confidence and improving financial market conditions.

• The coming months are expected to deliver divergent movements in global headline and core inflation. The steep decline in headline inflation, which lowered the global rate to an estimated 0.2%oya in June, is nearing a bottom and will reverse course as the massive negative base effect from energy prices disappears. However, even as headline inflation swings higher, core inflation should continue to fall as the extremely low and falling rate of resource utilization gradually permeates the complex of wages and prices.

Aus NZ Weekly_20July09

ENDS

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