Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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•The string of remarkably strong economic data released in Australia in recent weeks has bolstered speculation that the RBA may need to tighten policy more rapidly than current market pricing suggests. The 4Q CPI report this week will be the highlight, but will do little to alter our view that the RBA will deliver another 25bp rate hike in February. A stronger-than-expected set of inflation numbers would, however, increase the likelihood of another back-to-back rate hike in March. The RBA will release its December credit aggregates Friday. On our forecasts, private sector credit growth should have remained steady at 0.1%m/m, with lending to businesses again the main drag—larger corporates have direct access to equity and debt markets, making the financing problem less acute than before.

•The subdued fourth quarter inflation data in New Zealand last week failed to alter our expectations that the RBNZ will kick off the next tightening cycle earlier than official guidance suggests. Current policy settings are too accommodative given the Kiwi economy is firmly on the recovery path. There are two main reasons for an early tightening: the recent pickup in housing activity and the medium-term inflation outlook. Rising domestic prices and diminishing excess capacity point to upward inflation pressures in the medium-term. Though we expect ‘no change’ from the RBNZ this week, we will closely scrutinize the statement accompanying the decision for further clues on the timing of the first rate move.

•In the midst of a synchronized economic downturn, policymakers across the globe delivered aggressive stimulus. With the medication now working and expansions established, focus is shifting toward gauging policy normalization. Recent developments make clear that Emerging Asia will lead the way. As actions are expected to take hold across a wide front in the coming months, markets are expressing concern that these adjustments will damage regional growth prospects and perhaps even short circuit the global recovery. However, when the dust settles later this year, Emerging Asia will likely maintain the most accommodative stance relative to its cyclical position, and the modest policy adjustments will not have a large impact on growth.

• Since the turn of the year, we have highlighted downside risks to the outlook for the Euro area and Japan, and each week has brought further validation of these concerns. In each economy, we have maintained that the positive spillover from strong IP and export growth will ultimately lift growth to an above-trend pace in 2010. For the Euro area, last week’s flash PMI reading for January suggests no such spillover is yet occurring. While the manufacturing index edged up, the services component fell one full point, leading to a drop in the composite to a level consistent with GDP growth of just under 2% annualized, weaker than our 1Q10 projection of 2.5%. That said, it is encouraging that the January level of the PMI is higher than it was at the start of each of the growth accelerations the region has seen since 1998.

ENDS

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