Australia And New Zealand - Weekly Prospect

Australia And New Zealand - Weekly Prospects

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• In a week jam-packed with Aussie data, including the 4Q GDP print, the highlight will be the RBA raffle, which is drawn Tuesday. Market pricing implies it is a coin toss; traders place the probability of a 25bp rise at 56%. Our forecast is that there will be no change although, like that of the market, our level of conviction is low. The case for a hike is convincing, but it was strong last month when the RBA bucked unanimous expectations for a hike. The clouds of doubt around the consumer remain, as does the apparent anxiety about the tail risks associated with recent global events. So, on balance, we are sticking with our “on hold” call. Just about everyone agrees the cash rate is too low; it will be at least 100bp higher by the end of the year. Our lot as economists, though, is to pick the timing of the rate rises as well as their size. Getting the timing right, as we found in February, is harder than it seems.

• Business confidence in New Zealand may have jumped in February to its highest level since April 1999, but we maintain that the RBNZ will delay tightening policy until mid-year. The RBNZ will keep the powder dry for now, mainly owing to the recent string of weak economic data and Governor Bollard’s desire for hard economic evidence that the recovery in New Zealand has legs. The NBNZ survey showed that half of respondents expect the economy to improve over the next 12 months, marking the first rise in sentiment in three surveys. That said, the deteriorating medium term inflation outlook reaffirms our view that the RBNZ will lift the OCR from 2.5% currently to 4.0% by year-end. Our forecast is for the first rate hike to be a 50bp move in July, followed by a similar-sized move in September, before the RBNZ shifts back a gear to 25bp moves.

• Last week provided a study in contrast for global data watchers. While a string of upbeat readings on last quarter’s performance raised our global GDP estimate to 4.2%q/q saar—the fastest gain since mid-2003—there were genuinely weak activity readings to start the year. Downbeat readings were concentrated in the US, where January home sales collapsed and February initial jobless claims surged. At the same time, the new year has delivered consistently strong readings in Japan and emerging economies. This contrast partly reflects our forecast of a moderation in global growth this quarter, led by a projected halving in annualized US growth from its current 5.9% pace. Unfortunately, data-watching visibility has also been reduced by the cold and stormy weather in North America and Europe during the first two months of the year.

• A delegation from the European Commission, the ECB, and the IMF has been in Greece for the last week, examining the fiscal accounts. It appears that Greece will be asked to announce further tightening measures, possibly this week, to ensure that this year’s deficit target of 8.7% of GDP is met. The Greek fiscal crisis has already caused stress for other sovereigns in the region and for banks in Greece. But there is also a risk that too much pressure will be put on the Greeks to frontload the fiscal adjustment.

ENDS

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