Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

The RBA last week became the first G20 central bank to embark on policy normalization, a bare six months after delivering the last rate cut. Predictably, following the stunning September employment report, the consensus now has fallen in behind a second move in November. We are open-minded, but unconvinced. While a November hike carries a material risk, our call is for the next hike to come in December. Skipping November makes sense for a number of reasons: the domestic consumer-related data will soften post-rate hike; some of the global data has become patchy; waiting gives RBA officials time to assess how the highly-indebted consumer reacts; and, while officials want to withdraw the emergency component of the policy support, there is no mad rush—most other central banks are on hold. There is plenty of water to flow under the policy bridge before the November Board meeting, including this week’s consumer confidence reading and the speech by Governor Stevens.

In New Zealand, the economic data flow picks up this week. The highlight will be the 3Q CPI numbers. Headline inflation will remain comfortably in the RBNZ’s 1-3%oya target range for the second straight quarter, reaffirming our view that the start of the RBNZ’s tightening cycle is some way off. Attention should be directed to the nontradables component, which we forecast to print at the top end of the RBNZ’s comfort zone. We maintain our view that the RBNZ will deliver the first rate hike, a 50bp move, in July 2010. Retail sales this week probably will show only a mild rise, but a lot of the weakness will be explained by lower prices, rather than a sharp drop in volumes. Positive net immigration flows and a recent up-tick in housing market activity will support underlying sales.

With global policymakers having delivered aggressive stimulus, the global economy is now lifting in unison. Although the upturn began in Asia this spring, by early summer recoveries took hold in the Americas and Europe. If we are right, all major regions of the world grew at an above-trend pace last quarter. Our forecast is that above-trend growth can be sustained through 2010.

Although growth performance is likely to remain synchronized, there are important differences in the position of the world’s economies as this upturn begins. With EM and commodity producing economies having recorded an extended period of strong growth this decade, their utilization rates stand considerably higher than those in the G3. And while the financial crisis was felt across the globe, it is in the US and Europe that the lasting damage to credit markets has been concentrated. To an important degree, the US stands in a unique position, given the dramatic rise in its unemployment rate, the damage done to banks and securitized markets, and the deterioration in household finances.

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