Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• The week ahead in Australia is quiet, with just the 4Q dwelling starts data due for release on Wednesday. The highlight of the week, therefore, will be the release Tuesday of the minutes from the RBA’s March Board meeting, at which officials chose to deliver another rate hike. The tone will be upbeat, as before. One point of particular interest will be any discussion on consumers, and how they are coping with the rate hikes already delivered. Uncertainty over this seemed to be the main reason the RBA paused in February. The details of last week’s employment report for February were firm, even though the jobless rate ticked up a notch; the economy held on to the stellar job gains of recent months and hours worked soared 2.4% over the month. The report confirmed that further official rate rises are ahead, although we continue to believe the RBA will wait until early May before hiking again.

• RBNZ Governor Alan Bollard said in the statement accompanying last week’s ‘no change’ decision that higher bank funding costs are doing some of the heavy lifting on the policy front. This comment, though, failed to alter our forecast that the RBNZ will deliver the first rate hike in July. Bollard highlighted recently that the official cash rate (OCR) was not lowered in 25bp hops so, when the recovery appears sustainable, there could be some “meaty chunks” on the upside. Those “meaty chunks” will not match the 100bp or 150bp moves we saw on the way down, but 50bp moves are likely given the amount of policy stimulus that needs to be removed; we forecast 50bp hikes in July and September. The OCR currently is at a record low of 2.5%.

• Last year’s biggest macroeconomic surprise came from the household sector, which delivered the decisive spark lifting the global economy out of recession. The consumer’s rapid swing from deep contraction to above-trend spending gains directly boosted growth while also prompting large changes in financial markets and business decisions. Indeed, global manufacturers have been playing catch-up, adjusting levels of production to better-than-expected news on final demand. This development has sustained a double-digit pace of global industrial activity gains for more than six months now. To be sure, the lift by consumers was supported by substantial fiscal stimulus that is now fading. However, there are strong reasons to believe that the global consumer will continue to provide surprisingly solid support for growth this year, even as fiscal supports fade from the scene.

• China’s inflation rate was higher than expected at 2.7%oya in February. The reading raises the question of whether the economy might be overheating and elicit a strong policy response. Although a more broad-based tightening in policy does appear imminent, the chances that Chinese authorities will take forceful action to slow the economy appear low. For one thing, the pickup in inflation in China largely is limited to food, whereas non-food inflation is barely above zero. In addition, while there were signs of a healthy rebalancing in January/February activity data—with exports accelerating alongside a moderation in investment—there also were hints that GDP growth might be softer than expected this quarter. In particular, sequential gains in both IP and retail sales are relatively sluggish in the quarter-to-date when compared with our forecast for growth in GDP (9.8%q/q saar).

Stephen Walters

ENDS

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