rba rate move on a knife edge

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.

*****

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.

*****


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.

*****

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.

Reuters.