Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• We expect the RBA to pull the official interest rate trigger again on Tuesday, which will be the sixth hike from the last seven opportunities. Last week’s upside surprises on the quarterly inflation prints—producer and consumer, headline and core—strengthened the arguments for a hike, although the case is not open-and-shut. Indeed, sovereign troubles in Europe could prompt RBA officials to pause until June. It is clear, though, that the cash rate should be closer to normal, so why delay? In addition to last week’s inflation surprises, even at this early stage of the upswing, the economy has limited spare capacity, and the terms of trade is poised to spike. In Friday’s SoMP, the RBA probably will lift the official inflation forecasts; this will look a little odd in the absence of a rate hike. This week also sees the release of retail sales, building approvals, and house price data. We expect a healthy gain in 1Q home prices today, which will strengthen the case for an RBA hike tomorrow.

• The RBNZ last week left the cash rate steady, but indicated that policy stimulus will be removed “over the coming months.” This was a subtle, but important, shift away from previous guidance, which effectively had locked the bank into a “mid-year” hike. We continue to call for the first hike in July. By then, the RBNZ should have two healthy GDP prints in hand, after the solid 0.8%q/q result in 4Q09 and our forecast for another 0.8% rise in 1Q10. Important data on the labour market comes to hand this week. The employment report Thursday will be the highlight. The unemployment rate will likely have remained steady at a 10-year high of 7.3% in 1Q, although, on a positive note, employment probably increased for the first time in five quarters.

• Even as the global recovery gains breadth and momentum, European fiscal developments are a reminder that the process of healing from the severe global recession will be a slow and painful one. Initial soundings on 1Q GDP from the US and Emerging Asia have been strong, consistent with our view that global GDP rose at a near 4% annualized pace in 1Q10. Given the impressive advance in the higher-frequency indicators, the economy may do even better in the current quarter. The available business surveys rose impressively in April and stand far above their 1Q averages, a finding that should be confirmed by our global PMI this week. Notably, the surprises are coming from across the globe and include both manufacturing and services, and small as well as large businesses. Consumer confidence also is up, reflecting the improving labour market, as seen in last week’s reports from Japan, Germany, and Brazil.

• Strong data reports in EM Asia continue to reinforce the view among regional policymakers that a gradual tightening is appropriate. Once China begins its rate hike cycle and allows its currency to appreciate—events we expect during the current quarter—that will strengthen the resolve of others in Asia to do the same. But even before those initial moves in China, recent data releases are pushing policymakers in individual countries to reach the same conclusion. Over the weekend, China moved once again to raise reserve requirements, the third such move since the start of 2010.

Note: we distributed separately yesterday our summary of the main measures announced in the Henry Tax Review.

ENDS

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