Sydney - Tuesday - August 2: (RWE Aust Business News) Stephen Walters, chief economist for JP Morgan says the decision at today's RBA Board meeting will be a very close call. We continue to believe the Board will leave the cash rate steady at 4.75%, but last week?s ugly inflation prints, including on the core measures, give officials an excuse to hike. We suspect, though, that there is enough uncertainty surrounding the outlook, globally and domestically, to keep the RBA sidelined for a while longer. Indeed, we still expect the next hike in November, just after the 3Q inflation prints, by which time the smoke should have cleared. Friday's quarterly statement from the RBA will see downgrades to expected GDP growth (as the drag from the floods is captured), but retention of the above-target core inflation forecast for 2013. The latter may even rise, owing partly to the higher base. This will confirm the cash rate is headed up; the only material debate is over the timing, and that discussion may be settled today. The dataflow this week, for what it is worth, includes monthly retail sales, home approvals and trade data, and quarterly house prices.
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A very hawkish statement from the RBNZ last week, following a second consecutive strong business confidence survey, prompted us to drag forward the preferred timing of the RBNZ?s first rate hike to September, and to up-scale it to 50bp. Governor Bollard left the cash rate steady last Thursday, as was unanimously expected, but issued a short statement that indicated he is uncomfortable with the ?insurance? setting for the cash rate. Also, he indicated that the economy is growing more strongly than he expected. In response, in a change of forecast, we now expect the RBNZ to unwind this year's 50bp rate cut in September; previously, we expected Bollard to wait until 2012 before starting to normalize policy. Subsequent smaller rate hikes will depend on the level of NZD, and how conditions evolve offshore.
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There are strong crosscurrents in underlying global industry data. The recovery in Japanese exports is restoring the global supply chain, prompting powerful advances in global auto output. By contrast, output in Asia's high-technology sector declined in June, suggesting that manufacturers in industries less affected by spillover from Japan were still completing inventory adjustments. In this light, it was encouraging to see that inventories are now falling in Taiwan, where the biggest overhang developed in 1H11. The relatively narrow advance in both Asian and global IP to date helps explain why many manufacturing PMIs were losing altitude into midyear even as IP growth picked up pace. A pickup in final demand would facilitate these inventory adjustments, while ensuring a more broadly based and durable recovery in Asian and global IP in the coming months.
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The bigger question mark is the United States. This week?s reports are expected to show that US real consumer spending rose 0.3%m/m in June, a dramatic improvement from the stagnant second quarter. And July light vehicle sales are forecast to rise to near 12 million units. But the sustainability of this faster pace of advance remains in doubt. The July labour market report is expected to deliver a subpar 90,000 gain in private payroll jobs, underscoring that some of the purchasing power relief US households are receiving continues to be offset by weaker labour income growth. In addition, US consumer confidence has fallen sharply in recent months.
