Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• Tomorrow’s RBA decision is the clear highlight in Australia this week; we look for a 25bp rate hike and for upgrades to the RBA’s growth and inflation forecasts in the quarterly statement on Friday. The steady stream of firm domestic data since the last rate decision in December, and last week’s elevated core inflation measures, effectively locked in this week’s hike. The RBA’s commentary Tuesday probably will be balanced, with references to strong activity domestically and in Asia contrasted with equity market weakness, which drags on household balance sheets, and renewed global financial instability. We expect the Aussie banks to respond with variable mortgage rate rises of at least 25bp. An assertive response by the commercial banks is one reason why a follow up rate hike in March is, at best, a coin toss—the banks are doing some of the hard yards for the RBA, so there is no rush.
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• RBNZ officials seem comfortable with the medium-term inflation outlook; this comfort, however, probably will abate as the economic recovery gathers momentum. We, therefore, maintain that Governor Bollard will lift the cash rate before official guidance suggests. That said, we now forecast the first rate hike will be delivered in April, rather than in March. Dr. Bollard on Friday said that while New Zealand’s inflation targeting monetary policy has been “flexible, durable and successful”, the risk now is that officials may keep monetary and fiscal conditions easy for too long. Indeed, he believes the successful removal of fiscal stimulus would ease pressure on monetary policy. Bollard highlighted that the RBNZ cut official interest rates in “big jumps”, which means there could be some “meaty chunks” on the upside when the tightening cycle begins.

• The global expansion gained momentum into year-end, with global GDP rising at an estimated 3.7% ar in 4Q, more than a point above our estimate of trend. The challenge that lies ahead is to broaden and strengthen the foundation that has been established.

To date, the recovery has depended heavily on the manufacturing sector, which delivered record 10% annualized output gains in 2H09, boosting GDP growth by an estimated 2%-pts. The factory boom still has room to run. Manufacturers boosted output as companies moved to trim the rate of inventory liquidation around the middle of last year.

• Along with Asia, the US is at the leading edge of the inventory shift, as seen in last week’s US GDP report. Yet our metrics indicate that global inventories were still contracting at year-end. Combined with growth in final sales, this means inventory/sales ratios are still falling fast. Thus, we look for further robust gains in global manufacturing output in 1H10 (7% annualized).

• By contrast, activity outside of the industrial sector is improving slowly This is seen most clearly in the production index of our global services PMI, which stands at a relatively subdued 52.1 and at a record low in relation to its manufacturing counterpart. This survey captures final demand and thereby understates inventory dynamics in the nonmanufacturing sector, so it is not necessarily signaling downside risk to growth. But it is a signal that the expansion remains narrowly based at this juncture. A move up in the services PMI in coming months would confirm that the expansion is broadening.

ENDS

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