Australian Economics Weekly 120330

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ANZ RESEARCH AUSTRALIAN ECONOMICS AUSTRALIAN ECONOMICS WEEKLY AN APRIL RBA RATE CUT IS NOT OUT OF THE QUESTION 30 MARCH 2012 INSIDE Economic Update The Week Ahead In Focus Weekly Data Wrap Data previews Data Calendar Forecasts 1 1 2 5 6 9 15 ã Government positioning ahead of the May federal budget well and truly began this week, with Treasurer Wayne Swan warning of tough fiscal conditions in a speech to the Australian Business Economists. Treasurer Swan said revenues were lower than expected in
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    AUSTRALIAN ECONOMICS WEEKLY AUSTRALIAN ECONOMICS ANZ RESEARCH 30 MARCH 2012INSIDE Economic Update 1  The Week Ahead 1  In Focus 2  Weekly Data Wrap 5 Data previews 6 Data Calendar 9 Forecasts 15   CONTRIBUTORS Warren HoganChief Economist +61 2 9227 1562Warren.Hogan@anz.com Ivan ColhounHead of AustralianEconomics and PropertyResearch +61 2 9227 1780Ivan.Colhoun@anz.com Julie TothSenior Economist +61 3 9273 6252Julie Toth@anz.com Craig MichaelsSenior Economist +61 3 9273 1112Craig.Michaels@anz.com Justin FaboSenior Economist +61 2 9227 1646Justin.Fabo@anz.com Cherelle MurphySenior Economist +61 2 6222 8220Cherelle.Murphy@anz.com David CanningtonEconomist +61 3 9273 4274David.Cannington@anz.com Andrew McManusEconomist +61 2 9227 1742Andrew.McManus@anz.com Dylan EadesEconomist +61 3 9273 2708Dylan.Eades@anz.com Savita SinghAnalyst Savita.Singh2@anz.com David XuAnalyst +61 3 9273 3049David.Xu@anz.com AN APRIL RBA RATE CUT IS NOT OUT OF THE QUESTION ã   Government positioning ahead of the May federal budget well and truly beganthis week, with Treasurer Wayne Swan warning of tough fiscal conditions in aspeech to the Australian Business Economists.   Treasurer Swan said revenues were lowerthan expected in November’s mid-year budget review, due largely to lower company taxrevenue. A sustained recovery in global growth was also not likely to lead to a similarrecovery in revenue growth, he said, in large part because the huge level of mininginvestment underway is increasing depreciation deductions for mining companies. Butthe government remains firmly committed to a surplus in 2012–13, arguingthat a surplus is “economically imperative”  in an economy expected to grow aroundtrend, with low unemployment and a massive investment pipeline. It also “sends a strong message of confidence to investors across the world in uncertain times”  . TheTreasurer signalled further “substantial savings”  in the May budget in order to achieve asurplus, including through cutting and cancelling existing programs. ã   Otherwise, it was a relatively quiet week , with no major data released. Privatesector credit data was slightly stronger at +0.4% m/m in February. This reflected highergrowth in business, housing and personal credit, which were supported by greaterstability in global financial markets and recent RBA rate cuts. ABS job vacancies rose0.7% q/q in the February quarter, following a fall of 3.4% q/q in the November quarter,while in trend terms the series continues to weaken following its peak in early 2011. TheRBA also published its bi-annual Financial Stability Review  , which showed that householdfinancial stress measures remain low and that mortgage arrears rates, while still higherthan a few years ago, continue to fall. ã   In our In Focus  article this week, we argue that the probability of an RBA ratecut in April is higher than currently priced by the market. Recent communicationsfrom the RBA suggest the economy is not growing as quickly as it expected three to sixmonths ago. It also appears less certain that the strength in the resources sector will beenough to fully outweigh weakness in sectors under pressure from the high AUD andsoft demand. Given the evolution of the RBA’s thinking, we are more confident of ourforecast for a 25bp cut by the May board meeting. THE TWO WEEKS AHEAD ã   In Australia , the key event next week will be the RBA Board meeting on Tuesday. Dataon building approvals (ANZ: 1.1% m/m; market: 0.5% m/m), retail trade (ANZ: 0.3%m/m; market: 0.2% m/m) and the trade balance (ANZ: AUD1.3bn; market: AUD1.1bn)will be released. After the Easter break, ANZ job ads and the NAB business survey are due,as well as employment data (ANZ: +5k; market: not yet avail.). In New Zealand , theFonterra global dairy auction will be the key economic event. ã   In China , following the manufacturing PMI data (ANZ: 51.2; market: 50.6) over theweekend, trade, industrial production and GDP data will be released after Easter. ã   In Europe , euro-zone finance ministers are due to meet tonight. Next week, the ECB andBoE decide on monetary policy. Manufacturing PMI and, the following week, industrialproduction data are also due. ã   In the United States , ISM manufacturing and non-farm payrolls data will be key nextweek. We receive the minutes from the latest FOMC meeting, and there are a host of Fedspeakers over the coming fortnight. ***PLEASE NOTE THAT THERE WILL BE NO AUSTRALIAN ECONOMICS WEEKLY   PUBLISHED NEXT WEEK DUE TO THE EASTER HOLIDAY***  Australian Economics Weekly / 30 March 2012 / 2 of 17 IN FOCUS CAN THE AUSTRALIAN ECONOMY AFFORD TO GROW MOREQUICKLY? MIGHT THE RESERVE BANK REDUCE INTEREST RATES INAPRIL? Recent communications by the Reserve Bank suggest the market is under-estimatingthe chances of a reduction in the official cash at next week’s RBA Board meeting (seeFigure 1), notwithstanding the recent increase in pricing by the market. The Minutes forMarch, together with a recent speech by the Governor contain subtle but importantevolutions in the Bank’s thinking. This raises our confidence in ANZ’s forecast of a ratecut by May and suggests a move at the April meeting next week cannot be ruled out. FIGURE 1. MARKET PRICING AS OF 30 MARCH 2012 Monthlychange(bps)Cumulativechange(bps)Expectedcash rate Apr-12-0.10-0.104.15May-12-0.13-0.234.02Jun-12-0.13-0.363.88Jul-12-0.11-0.483.77Aug-12-0.08-0.563.69Sep-12-0.06-0.623.63Oct-12-0.03-0.653.60Nov-12-0.03-0.683.57Dec-12-0.05-0.733.52Jan-13-0.01-0.743.51Feb-13-0.02-0.763.49Mar-130.00-0.763.49Apr-130.00-0.763.49   Sources: ANZ, Bloomberg The RBA March Board Meeting Minutes noted: ã   Retail sales growth had softened since mid-2011, with notable weakness in partsof the industry, including department stores and retailers of household goods (thisis the most shrill the RBA has sounded on retail sector weakness); ã   Labour market outcomes reflected the opposing cross-currents in the Australianeconomy… with little net employment growth in the economy (we would contendthat little employment growth is a poor policy outcome in the middle of the largestmining boom in living memory); and ã   The housing market remained soft.Each of the above statements hints at an evolving view that the domestic economyis not performing as the RBA envisaged 3-6 months ago . In the final sectionheaded “Considerations for monetary policy” the Minutes report: ã    “A key question was whether the necessary adjustment was occurring at an overallpace of growth that kept the economy close to trend and inflation close to target.”;and ã    “Members were also alert to the uncertainties inherent in assessing the response of the domestic economy to the disparate forces at work, including the very large risein resources investment and the high exchange rate”.In a speech that post-dated the last RBA Board meeting, the RBA Governor said: ã    “On the other hand, recent national accounts data suggest growth in the non-farmeconomy somewhat below trend over 2011.”; and Ivan ColhounHead of AustralianEconomics and PropertyResearch +61 32 9227 1780Ivan.Colhoun@anz.com  Australian Economics Weekly / 30 March 2012 / 3 of 17 IN FOCUS ã    “Overall, recent economic performance in Australia is not too bad, particularlywhen compared, over a run of years, to a number of other advanced economies.But neither is it so good that it cannot be improved. The full range of policies –macroeconomic and structural – need to play their part in seeking thatimprovement.” These comments provide the first public take on the RBA’s views of the Decemberquarter national accounts and the performance of the economy in recent months.Again, they suggest that the Australian economy is performing less stronglythan the RBA was previously expecting , notwithstanding the fact that the mininginvestment boom continues apace.Taken together, it appears that the RBA is evolving towards a view that, for domesticreasons , the Australian economy could probably afford to grow a little faster withoutgenerating significant inflation. The rate reductions late last year were deliveredprimarily on account of global concerns. While the likelihood of a disastrous globalgrowth outcome has reduced in recent months, the expectation remains that globalgrowth will be slightly sub trend this year.The conventional market thinking is that the Bank will wait to see the March quarterCPI in late April before considering any further policy easing in early May. However, along period of watching the RBA suggests that once the Bank believes there is acase for a change in monetary policy, it rarely delays its decision . Our readingof the recent communications suggests the Bank is evolving in the direction of makingthe case for a rate change.In conclusion, the current evolution of the domestic data suggests that an earlier-than-expected interest rate cut by the RBA at next week’s April Boardmeeting is still a greater risk than currently priced by the market. In light of theevolution of the RBA’s thinking, we are also more confident than before of our forecastof a 25bp cut by the May board meeting (see Figure 2). FIGURE 2. RBA CASH RATE: ANZ FORECASTS VS MARKET PRICING 234567895969798990001020304050607080910111213    % RBA Cash RateANZ ForecastCurrent Cash Rate FuturesCash Rate Futures (Nov-11)average since 1995   Sources: ANZ, Bloomberg, RBA  Australian Economics Weekly / 30 March 2012 / 4 of 17 DATA WRAP AUSTRALIA DATA WRAP   ã   ABS job vacancies increased 0.7% q/q in February quarter, but the trend remainedweak. This is in contrast with other leading indicators for employment, such as the ANZJob Advertisement series, which showed signs of improvement in January and February.Not surprisingly ABS job vacancies were the highest in the states of Western Australiaand Queensland (as a percentage of the labour force). ã   HIA new private home sales for February increased by 3.0% m/m, but did not fullyreverse the previous month’s 7.3% fall. ã   RBA private sector credit increased by 0.4% m/m in February, following a reading of 0.2% m/m in January, and appears to reflect improved confidence following somecalming in European financial markets and the 50bp easing by the RBA in late 2011. Theyear on year trend, however, is unchanged at 2.5%. ã   ABS migration data was weak, with net overseas migration increasing by just 2k to172k in Q3 2011. Savita SinghAnalyst Savita.Singh2@anz.com
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