Australian & New Zealand Weekly

Week beginning 8 September 2008

• Australia: RBA Governor to leave door open for October cut.
• Westpac-MI Consumer Sentiment to gauge rate cut reaction.
• Australian data: housing finance, retail sales, labour force.
• RBNZ MPS: 25bp cut expected to avoid de facto tightening.
• New Zealand data: building work, terms of trade, retail sales.
• US data: consumer sentiment, trade, PPI and retail sales.
• Key economic & financial forecasts.

Australia: RBA Governor to Leave Door Open for October Cut

Next Monday we will see the Reserve Bank Governor's semi annual appearance before the House of Representative's Standing Committee on Economics. His opening statement will provide an opportunity for a more detailed justification for this week's rate cut. We will be particularly interested in how he deals with the stronger than expected boost to spending on investment goods. Some commentators argue that the details in this week's national accounts make it less likely that we will see a swift follow up to this week's move. We take the contrary view. The interest rate sensitive parts of the economy - consumers, housing, and retail/hospitality all slowed more sharply than expected. In growth terms that was partly offset by a surge in plant and equipment investment most likely dominated by the mining industry. This surge in investment and business expectations is likely to cause the Bank to raise its economic growth forecast.

The Governor may actually give this revised forecast in his Statement. However markets should not interpret that as a sign that rate cuts are being shelved. If growth is being dominated by mining investment - an industry that employs directly only 1% of workers and adds little to domestic demand pressures then risks to inflation are hardly raised - excessive weakness in labour intensive household spending and housing will take the required pressure off price pressures. In short the market should not be spooked if the governor raises his growth forecasts due to stronger business investment.

As expected the Reserve Bank cut rates by 25 bp's following its Board meeting on September 2. We had originally expected the cut to be 50 bp's but lowered that call to 25 bp's when we saw the extraordinary results from the survey of capital expenditure plans which was released on August 28. With the outlook for business investment sharply higher than the market or the Bank had expected the cautious approach of only cutting by 0.25% seemed more appropriate.

The importance of that survey and the 10% rise in plant and equipment investment in the June quarter was emphasised in the Governor's Statement where the most significant change to the rhetoric of the previous Statement, the Minutes, and the August Statement on Monetary Policy was the observation that "fixed investment by businesses continues to be very strong". The surprise from the Capex data stands in contrast with the 17 year lows in most business confidence surveys and the collapse in business credit growth (3 month annualised growth pace has slowed from 21% a year ago to 4.5%). In recognition of that sharp contrast the Governor refers to "a softening in business activity" in another part of the Statement.

Last month we forecast that this easing cycle would be different to previous cycles. In the last two easing cycles rates were reduced by 225 (2001) and 250 (1996/97) basis points within a year. In this cycle we expect there to be a 'pause' in the cycle after the first 100 bp's of easing. That 'pause' is likely to occur from around February/ March next year. The Bank's plan will be to hold demand growth at a reasonable 2-3% pace for an extended period to generate sufficient excess capacity to move underlying inflation back to within the 2-3% target band by end 2010 from its current formidable 4.5%. With official cash rates at 6.25% and bank mortgage rates 50 bp's higher than 'normal' due to the higher wholesale funding costs associated with the credit crisis, financial conditions will still be contractionary and should gradually deliver the desired result on inflation. Of course, contractionary financial conditions should not be maintained once inflation pressures appear to easing significantly and the Bank should be able to move conditions towards neutral and into the expansionary zone during the course of 2010. We would expect another 100 bp's of rate cuts through 2010.

The next move in the cycle (another 25 bp cut) is expected to follow the Bank's Board meeting on October 7. Evidence from the national accounts which were released for the June quarter add to the case for another move. The accounts showed that household expenditure contracted for the first time in a quarter since 1993. Tight financial conditions and high energy prices have severely constrained consumers. The case to ease financial conditions for consumers and those businesses which are not benefiting directly from the commodity boom is very strong. The only growth in the June quarter was delivered by a 10% increase in plant and equipment investment. That stems directly from a 13% increase in the terms of trade and an associated 12% jump in profits. In contrast household incomes only rose by 2%.

It is tempting to conclude that the investment boom is confined to the mining sector. However the Capex Survey indicated the investment surge was more widely distributed. Our analysis of the Survey indicates that mining investment (28% of Capex) is expected to be boosted by 45% in 2008/09 while services investment (55% of Capex) is expected to rise by 23% in nominal terms. Overall the Capex Survey points to a 29% increase in investment in 2008/09. That would see the Reserve Bank's targeted below trend growth profile impossible to achieve without an unprecedented contraction in consumer spending.

That will not happen but equally we strongly doubt the reliability of the Capex signal. Capacity constraints are likely to severely restrict the mining plans; tighter lending restrictions and funding costs are likely to hamper the services plans compounded by a deteriorating outlook for sales as consumer spending remains lack lustre. Current investment expectations for a number of domestically focussed industries - finance (12% growth), retail (15%), telecommunications(22%), wholesale trade (19%) - are all expected to be revised down. Indeed if the collapse in business credit growth is a reliable lead indicator we may see similar downward revisions to those in the early 1990's when the Capex survey proved to be unreliable.

Booming mining investment might make the aggregate GDP numbers look respectable but the employment multiplier (mining is only 1% of direct employment) effect of the mining industry is unlikely to soothe the RBA's concerns if consumer spending and housing continue to show the extraordinary weakness of the first half of 2008. It is likely that the RBA will raise its headline growth numbers but remain just as concerned about the damage to the Australian economy of overly tight financial conditions.

Bill Evans, Chief Economist, Westpac, ph (61-2) 8254 8531

Australia: Data Wrap

Aug TD-MI inflation guage

• The TD-Melbourne Institute inflation gauge rose 0.1% in August (0.13% to two decimals) following a 0.4% rise previously (0.42% to two decimals). The main sources of higher prices cited were fruit and vegetables, insurance premiums, and gas and other household fuels. Partially offsetting price falls were seen in petrol and overseas holidays. In fact, without the sharp fall in petrol prices, the gauge would have risen a record-equaling 0.6%mth. Still, with a strong 0.51%mth result from August 2007 dropping out, annual growth in the gauge fell sharply to 4.2%yr from 4.6%, the lowest since March.
• With the August rise much lower than that seen three months prior in May (0.31%), 3mth growth fell to 1.03% from 1.22% previously, the lowest since March. With this 1.03% 'mid-mth of the quarter' pace well below that seen in May (1.24%) and February (1.15%), this reinforces our expectation of a much tamer headline CPI pace in Q3 after Q2's 1.5%qtr and Q1's 1.3%qtr spike.
• However, while the headline inflation gauge was encouraging, its dependence on the fall in petrol prices reveals a persistence in the breadth of price pressures elsewhere. In August, prices rose in a net balance of 33 items, up from a net 26 previously and the highest breadth since July 2007. That breadth in August is consequently well above its six month average (18.7) and 12 month average (17.2) and suggests that any Q3 deceleration in underlying inflation is unlikely to match the headline slowing. This supports our view that after an initial 100bps of rate cuts by early 2009, we expect the Bank to leave rates on hold for a long period until they can be more convinced that underlying inflation is returning to the target band.

Q2 business indicators

• The Business Indicators revealed weakness on the expenditure side, with a larger than expected inventories subtraction. By contrast, 'real sales' rose sharply and nominal income components showed strength.
• Inventories will subtract 0.5ppts from Q2 growth, rather than detract the 0.3ppts we expected.
• The income side was particularly strong - in nominal terms. However, real growth for GDP(I) may be modest, with the deflator likely to jump by as much as 3.0% in the quarter.
• Income strength was particularly apparent in company profits, up 14.3% - or 10.8% after adjustment. Even outside of mining, profits exceeded expectations.
• 'Real sales' expanded by 1.6% in the quarter, which is at odds with other indicators. Arguably, this suggests that while growth in the economy slowed in Q2, the economy didn't stall.

Q2 current account deficit

• The Q2 current account deficit fell to $12.774bn from an upwardly revised $19.842bn (consensus $11.9bn). Using our forecast of Q2 GDP, this cut the deficit to 4.4% of GDP from 7.0%, the lowest since 2002Q3.
• The trade balance turned sharply as flagged in the monthly trade data, improving by $7.872bn to a surplus of $559mn, the most positive position since 2001Q3.
• Export values surged by 16.7% with a volume-led 7.7% bounce in rural goods reinforcing a price-led 25.8% surge in non-rural goods. Still, non-rural export volumes growth improved, led by strong gains in coal.
• Import values rose 2.8% with volumes growth slowing to 2.2%qtr, the weakest since 2007Q2, responding to the steep slowing in domestic demand growth. Consumption goods volume growth slowed to its weakest since 2007Q2 and capital goods volumes were virtually flat.
• Net exports will subtract 0.1ppts from growth, worse than expected (consensus +0.2ppts) but still a significant improvement from the 0.7ppt drag in Q1.
• The net income deficit unexpectedly widened to $13.284bn from $12.487bn. Income credits rose 3.1% led by gains in inflows on direct equity investment offshore. But this was swamped by a 4.9% rise in income debits. An improved corporate profit performance saw a jump in outflows on direct equity investment in Australia. Debt income outflows also rose solidly despite the higher AUD.

RBA policy announcement

• As widely anticipated, the Reserve Bank Board lowered the cash rate by 0.25% to 7.0%, the first easing of monetary policy since December 2001.
• A key point in the RBA's accompanying Statement relates to the Bank's view on business investment. The Bank has taken last week's surprisingly upbeat survey of business investment intentions seriously, casting some doubt on the extent of the domestic demand growth slowdown beyond the household sector. In an acknowledgement of one of the positives from the terms of trade surge, the Bank noted that "Fixed investment spending by businesses continues to be very strong". This implies the Bank is taking last week's capex survey at face value.
• Even so, the Statement included more dovish comments relating to "a softening in business activity and growth in production has slowed" and "it is looking more likely that household demand will remain subdued and overall economic growth slow over the period ahead".
• In our view, changes in the language of the Statement are not materially substantial enough to suggest that the Bank intends to diverge from their 'plan' to ease rates in September and to quickly follow this up with an additional rate reduction. Our call remains for a 0.25% interest rate cut in October.
• The policy outlook beyond next month reverts to a forecasting game for domestic demand. We expect the tightness of conditions to continue weighing on the economy and the household sector in particular. As the data unfolds over the next several months, the case for additional rate cuts will build. Our call for this easing cycle remains a 1.0% reduction in rates to 6.25% by early 2009.

Jul dwelling approvals

• Dwelling approvals fell 2.3%mth in July, well below market expectations of a 0.3% rise and our more bearish forecast of a 1% decline. However, overall, the release was significantly stronger than the monthly result suggested with major upward revisions to historical estimates moderating what was already a comparatively mild downtrend since the start of the year.
• The bulk of the revisions were in private sector apartment approvals, which were down 2.3% in July but revised historically to be up 2.4% on a year ago basis. Moreover, approvals in this segment are still rising at 0.6%mth in trend terms (an annual pace of 7.6%). Private sector house approvals - usually a better barometer for underlying trends - have continued to weaken, falling 3.4%mth in July to be down 7.2% in trend terms from their late 2007 peak. Moreover, the pace of decline in this segment has picked up steadily since the start of the year (now running at -1.2%mth, an annual pace of -13.6%). Conditions remain mixed across states with weakness in NSW and Qld (albeit off record highs), but resilience in Vic and WA and outright strength in SA (where trend approvals are at a 23yr high).
• The value of renovation approvals has rebounded in the last two months, but remains flat in trend terms. The value of nonresidential building approvals has also strengthened in July, led by stronger public sector approvals.
• Overall, the data suggests some intensification of the downturn in dwelling construction through the middle of the year, but from a much milder starting point that means the expected drag from residential construction over 2008H2 will also be milder.

Q2 GDP

• GDP growth in Q2 was a little weaker than anticipated, coming in at 0.3%, 2.7%yr. The farm sector was a significant drag, with output declining by 8.3%. Non-farm GDP growth was 0.5%, 2.5%yr.
• The Australian economy has stepped down a couple of gears. Moreover, there is a significant divergence / imbalance between weakness in the household sector and strength in overall business investment.
• Sharply higher interest rates, tighter lending standards and the global credit crunch have weighed on activity. However, at the same time, the Australian economy is benefiting from the commodity boom.
• Australia's terms of trade leapt 13.1% in the quarter, boosting incomes - particularly mining profits.
• Consumer spending contracted by 0.1% in the quarter, the first decline since 1993. Housing construction was broadly flat in the period.
• Overall business investment was stronger than expected, rising by 4.0%, 9.9%yr. It is also notable that the CAPEX survey reports upbeat investment intentions for 2008/09.
• The public sector boosted growth, with the upswing in investment apparent.
• Net exports were neutral in the quarter, a significant improvement from the last half year. However, inventories sliced 0.5ppts off Q2 growth.
• This report emphasises the two speed nature of the economy. The 13.1% lift in the terms of trade boosted private nominal profits (non financial sector) by 12%, whereas nominal household incomes were boosted by "only" 2%. With that imbalance, not surprisingly, the spending boost was largely confined to business spending, with real plant and equipment expenditure up 10.1% in the quarter and real household consumption spending actually contracting for the first time since 1993.
• Clearly the obvious constraints on the economy: excessively tight financial conditions; high energy costs; slowing employment growth have all more than offset the modest income boost to the household sector. This is very unlikely to change in the near term and the Reserve Bank is therefore highly likely to proceed with a second rate cut in October to ease the pressures on the household sector.
• Based on business confidence surveys it is also very likely that these same constraints are acting on a wide range of businesses as well (for example, retail and hospitality production contracted in the quarter). Even after the second expected rate cut in October, financial conditions will remain extremely tight for households. The issue will be the extent to which the income boost from the terms of trade works through to households and in turn encouraging stronger spending.
• Our view is that further easing in financial conditions will be required over the November to March period to shift household spending growth to a more reasonable pace than the current 12 year low (over the last six months).

Jul trade balance

• The trade balance was worse than expected in July at a deficit of $717mn, a $1068mn deterioration from a $351mn surplus previously. The consensus forecast was for a small surplus of $50mn while Westpac forecast a deficit of $350mn. Despite the deterioration in the headline figures, the trends remained encouraging, allowing the trend deficit to continue to narrow towards a balanced position, with a deficit in July of $34mn, the lowest since February 2002.
• Exports pulled back 0.8% after a 2.2% rise previously, their first fall since February. Rural exports fell 3.5% halting their uptrend. Non-rural and other goods exports disappointed with a 0.5% dip, but following a 3.4% jump previously, trend growth remained strong at +1.8%mth. These developments saw trend exports growth slow, but to a still historically solid 1.4%mth pace.
• The main driver of the net trade deterioration was a 3.9% bounce in imports after a 0.6% fall previously. But this still left in place a profile of a slowing uptrend in imports, with trend growth easing to 1.2%mth from 1.5%. Also, their $895mn rise was driven entirely by strong intermediate and other goods imports, in turn driven by a $822mn jump in fuels and lubricants. The more important barometers of domestic demand, consumer and capital goods imports, both fell. Consumer goods trend growth has slowed to just 0.1%mth while ex-aircraft capital goods trend growth has slowed to 0.6%mth, consistent with the relative resilience of business equipment investment compared to slumping household spending.

Round-up of local data released last week

New Zealand: The Week ahead & Economic Wrap

A spring in the step

It's been a quiet week for economic news in the lead-up to next week's Monetary Policy Statement. However, it's been mayhem in currency markets, with the New Zealand dollar falling to a 22-month low.

The only data of note this week was the Roy Morgan consumer confidence survey, which found New Zealand consumers with more of a spring in their step (yes, we forgot to do a spring-related pun last week). The survey rose from 94.9 to 107.3 in early September, the highest level since March. The details suggested that households are more confident about their own prospects, but the greater improvement was in confidence about the wider economy. In recent weeks we have discussed the potential benefits of lower petrol prices, but we have to admit that the breakdown of this survey is more consistent with the ‘slow burn' of lower interest rates than the ‘quick fix' of cheaper petrol.

The key event next week is the Monetary Policy Statement on Thursday. A lot has changed since the June MPS, the biggest change being that the RBNZ began easing in July, earlier than it had previously signalled. What appeared to have tipped the balance in July was a fear that higher offshore funding costs would lead to a de facto tightening, in the absence of an official rate cut. Those fears didn't quite pan out - lending rates were actually cut to varying degrees after the decision, rather than holding steady as the ‘funding cost' story would have suggested.

The RBNZ faces a similar issue this time around: current market interest rates are predicated on a series of OCR cuts over the rest of this year, so a pause at this stage could send rates higher again. As a result, next week's decision looks relatively straightforward for the RBNZ: deliver the 25bp cut that the market is pricing in.

The RBNZ is cutting it fine on the inflation front. Domestic activity was weaker than expected in the first half of the year, and global growth forecasts have been revised down, but in both cases it's an open question as to how much of this is due to the ‘shock' of higher food and energy prices. The RBNZ is counting on softer activity to reduce the pressure on inflation over the next few years, but if they're misjudging the causes of weaker activity - as we think they are - they could create some real headaches for themselves further down the track.

The RBNZ's comment in July that further rate cuts are likely on the condition that "there is no excessive exchange rate depreciation" was like a red rag to a bull for markets. The NZD has plunged more than 10% against the USD since then, fuelled by expectations of lower interest rates here and in Australia, concerns about the slowing global economy, and liquidation by Asian retail investors. The trade-weighted index is currently tracking about 4% below the RBNZ's projections, which will add to near-term inflation pressures.

Despite the weaker near-term growth outlook, the inflation profile could be at least as high as in June. The RBNZ doesn't have much wiggle room around the upper edge of their inflation target, but recent comments suggest that they intend to use it all. Their June projections had inflation remaining above 3% until 2010, and only reaching 2.6% by the end of their forecast window three years ahead - a margin that they described as "comfortable". But the July statement dropped the word "comfortable", and in a radio interview Dr Bollard said that he expected to "only just" meet his inflation target. Admittedly these statements were made when oil was closer to $130 a barrel, but there's no reason why oil prices today should have any bearing on inflation forecasts three years ahead. It seems instead that the RBNZ has decided to stretch their definition of price stability to its very limit, in order to deliver rate cuts now.

The RBNZ's 90-day rate projections are likely to signal a more rapid pace of easing than in June, without committing themselves to rate cuts at every review for the foreseeable future. We estimate that the developments since June, on balance, are worth an additional 25bp of easing in the RBNZ's forecasting model - and that includes the cut that was delivered in July. So the end point of their projected easing cycle may not be much lower than in June.

The RBNZ still faces a difficult balance between slow growth and high inflation - and markets clearly have no intention of making life easier for them. We don't share the RBNZ's confidence that softer growth will take care of the inflation problem, and as signs of growth start to emerge going into 2009 - it will be grumpy growth, with some sectors benefiting far earlier than others, but growth nevertheless - the RBNZ is going to have to return to tackling inflation head-on. We still expect the OCR to be reduced to 7.00% by early next year, a much higher ‘trough' than in previous easing cycles.

Round-up of local data released last week

Data previews

Aus Jul housing finance

Sep 9, Last: -3.7%, WBC f/c: 1.5%

Mkt f/c: flat, Range: -2.5% to 2.0%

• Housing finance has slumped over the last five months, under the weight of sharply higher interest rates.
• We expect a 'stabilisation' in July, forecasting a 1.5% rise. That follows a 27% decline in new lending to owner-occupiers.
• Our initial prior was that housing finance would decline further, with commercial banks raising interest rates in July independently of the RBA. However, industry data suggests that there was a slight improvement despite this.
• The RBA's decision to do a policy u-turn and cut interest rates in September - with a likely follow-up rate cut in October - should have some beneficial impact on demand for housing finance before the end of this year. The improvement in housing affordability will provide some much needed respite for the established market.

Aus Jul retail sales

Sep 9, Last: -1.0%, WBC f/c: 0.4%

Mkt f/c: 0.5%, Range: flat to 1.5%

• Retail sales fell 1.0% in June, extending the weakness seen through much of the first half of 2008 (sales fell in four of the six months). Consumers are tightening spending in response to higher interest rates, a sharp rise in fuel prices and heightened concerns about the economic outlook.
• July should see some improvement. Although there was another market-driven increase in mortgage rates (+15bps), this came mid-month, implying an impact spread over both July and August. More importantly, $7bn in income tax cuts introduced on July 1 should provide a boost to spending. Stable fuel prices should also reduce this dampening influence.
• Overall retail sales are forecast to rise 0.4% in July. Note that the ABS has reduced the survey's sample size (by about two thirds). Monthly estimates will become much more volatile as a result and may be less useful as a gauge.

Aus Sep Westpac-MI Consumer Sentiment

Sep 10, Last: 86.2

• The Westpac Melbourne Institute Index of Consumer Sentiment increased by 9.1% in August from 79.0 in July to 86.2 in August. This was the third biggest jump in the last five years and is mainly attributable to easing fuel prices (down 8% between surveys).
• The September survey is in the field from Sep 1 to 7. Factors that are likely to influence sentiment include: the RBA's 25bp rate cut and signals of more to come; the decision by banks to pass on the full reduction to mortgage rates; continued falls in world oil prices (down from US$145/bbl in early July to $110/ bbl currently); but a sharp slide in the currency (the AUD has fallen more than 10% vs the USD since the last survey); and weak economic data including soft growth figures for Q2.

Aus Aug employment chg

Sep 11, Last: 10.9k, WBC f/c: 10k

Mkt f/c: 5.9k, Range: -10k to 12k

• While employment growth beat expectations in July with a 10.9k rise, the underlying trends continued their gradual 2008 slowdown in line with our prognosis. Monthly trend growth slowed to a still positive 5.9k, while annual trend growth eased to 2.26%yr from 2.40%, only just below trend labour force growth of 2.28%yr, limiting upward pressure on the unemployment rate.
• While household spending has slumped significantly in 2008, and business confidence is weak, indicators of business activity have retained some relative resilience. We expect the gradual trend slowdown in jobs growth to continue through 2008H2 to 1.5%yr. We forecast a 10k rise in August employment, which would fit this prognosis, slowing monthly trend growth to 5.7k and annual trend growth to 2.14%yr from 2.26%yr.

Aus Aug unemployment rate

Sep 11, Last: 4.3%, WBC f/c: 4.3%

Mkt f/c: 4.4%, Range: 4.3% to 4.5%

• With the participation rate steady in July at 65.3%, labour force growth of 16.5k surpassed the jobs gain, nudging the unemployment rate to 4.29% from 4.25% (to two decimals) and leaving the rounded published rate steady at 4.3% for the 4th consecutive month. The trend unemployment rate continued to edge up very slowly to 4.30% from 4.26%, not far above its 4.13% low in February.
• With minimal change in the unemployment rate of late, and another trend-like forecast for jobs growth in August, we expect the participation rate to remain steady at 65.3%.
• A steady participation rate would see labour force growth again slightly beyond jobs growth, nudging the unemployment rate to 4.33% (to two decimals) and leaving the published rate at 4.3% for the 5th consecutive month.

NZ Q2 Building work put in place

Sep 8, Last: -6.3%

• The sharp increase in building work we saw at the end of 2007 was unwound in Q1. Non-residential building work declined almost 6%, while residential building was even weaker, falling 6.6%.
• Indicators suggest that Q2 building work was also weak. Nonresidential building consents point to another contraction in the quarter of around 5%. Dwelling consents point to a similar decline in residential construction.
• The correction in the housing market is having a material impact on the residential construction industry. We expect around 10-15% decline in residential construction this year. Nonresidential construction is expected to provide some offset, but to-date the indicators have been more subdued than anticipated.

NZ Q2 terms of trade

Sep 10, Last: 4.1%, WBC f/c: -3.4%

• The lagged impact of the run-up in world dairy prices has run its course, but prices of other farm exports such as meat and wool have held up. Crude oil is now New Zealand's third largest export, though imports of refined petroleum products mean that the net impact of higher oil prices on the terms of trade is still negative.
• We expect a 2.6% fall in export volumes, with drought conditions reducing dairy output this year. The Tui oil field has boosted volumes in recent quarters but is now at peak production. Imports of crude materials, plant and equipment remain surprisingly strong, suggesting that businesses are not going into hibernation despite the difficult conditions at present.

NZ RBNZ Monetary Policy Statement

Sep 11, Last: 8.00%, WBC f/c: 7.75%, mkt f/c: 7.75%

• The RBNZ cut the OCR in July due to concerns that higher offshore funding costs would be passed on to borrowers. While in hindsight that concern was perhaps overstated, it will be an issue again this month, as market interest rates already have an extended easing cycle 'baked in'.
• Growth forecasts for 2008 are likely to be weaker again. However, inflation forecasts will include an ugly 5% peak in Q3, and may be even slower to return within the target band than in June.
• We expect the 90-day rate track to endorse further rate cuts this year.

NZ Aug REINZ house prices

Sep 12, Last: -1.4% yr

• Housing activity looked to have found a floor between May and July with seasonally adjusted sales rising 27% over that period. However, Barfoot and Thompson data for August suggest that some of the rebound was short lived. As such, we expect August REINZ sales data to show some unwind of the gains in the past couple of months. Even so, we don't expect a full unwind and continue to believe that the low point in sales was reached through the June quarter.
• So far, prices on the REINZ measure have held up better than we anticipated, but to a large extent we believe that reflects a compositional shift in sales (i.e. it is the lower end of the market that has been hit the hardest in this downturn). We continue to expect a further fall in prices - our forecasts have house prices down 8% for calendar 2008 and a further 2% in calendar 2009.

NZ Jul retail sales

Sep 12, Last: 0.9%, WBC f/c: -0.3%, mkt f/c: -0.2%

• Total retail sales in the month of July are expected to fall, dragged down by motor vehicles as tight credit and high fuel prices take their toll. It is too early to expect much lift from the RBNZ 24 July cut. A 7.6% fall in car registrations in the month certainly points to weakness in retail sales.
• In contrast, we expected core sales to show moderate growth of 0.5% in the month following a flat June. Both credit card billings and the wider electronic card transactions data point to higher core retail sales in July. Core sales are likely to be helped by house sales bouncing off their lows through June and July and we wonder if any detectable influence will come from the first release of the Apple iPhone mid-month.

US Sep consumer mood indicators

Sep 9, IBD-TIPP economic optimism: Last: 42.8, WBC f/c: 44.0

Sep 12, UoM consumer sentiment: Last: 63.0, WBC f/c: 65.0

• On all measures, US consumer confidence was stronger in August thanks to falling gasoline prices.
• Around the turn of this month, gasoline prices appeared to have stalled as the hurricanes approached the Gulf Coast but with the potential for damage to refineries passed for the time being, gasoline prices have resumed falling, to be down 43c per gallon on average in the first week of September compared to the $4.11 peak back in mid July.
• Add in some better than expected news on the economy and it's almost a done deal that the various measures of consumer optimism/sentiment for early September should show further gains.

US Jul trade deficit to narrow yet again

Sep 11 , Last: -$56.8bn, WBC f/c: -$55.7bn

• The trade deficit unexpectedly narrowed again in June despite surging oil prices which had been expected to boost import values. In fact, non-oil imports fell 1.4%, offsetting some of the surge in oil imports and constraining the overall import rise to a still solid 1.8%. But exports surged 4%, broad-based across most categories except civilian aircraft.
• Import prices rose another 1.7% in July, their smallest gain in five months, and nearly half of that was due to non-fuel import prices. With domestic demand constrained, we expect overall imports to have risen just 1% in July.
• Export prices rose an impressive 1.4% in July, and with orders and shipments data solid (Boeing excepted), export volumes seem to have held up for the time being. Assuming a further 2% exports rise, the deficit should narrow further to $55.7bn.

US Aug PPI to post first fall this year

Sep 12, headline: Last: 1.2%, WBC f/c: -0.8%

Sep 12, core: Last: 0.7%, WBC f/c: flat

• The PPI jumped sharply again in July, reflecting the tail end of the commodity price boom but also unexpected strength in core factory price pressures (up 0.7%), partly due to steep rises in auto and light truck prices.
• In August, fuel and food prices fell significantly at the input stage of production with substantial feed-through to factory gate prices. Domestic vehicle sales were helped later in the month by the reintroduction of "employee discounts for all" at GM, but the promotion started mid-month so may not be fully captured by the PPI survey.
• Nevertheless we expect a 0.8% fall in the PPI headline (which would be the first decline in a year) and a flat core rate assuming the auto price discounts are in there.

US Aug retail sales: sharp bounce due autos

Sep 12, Last: -0.1%, WBC f/c: 1.0%

• Retail sales fell slightly in July, weighed down by a further decline in auto sales, which shaved 0.5 ppts off the growth pace. Ex auto sales rose 0.4%, with higher gasoline prices contributing 0.1 ppt of that.
• Auto sales are known to have posted a 10% rise in Aug thanks in part to to GM reintroducing the "employee discount for all" scheme. Lower gasoline prices will have also helped boost auto sales, but because they fell about 7% between July and August (month average) that will weigh on the total value of retail sales. Also weekly sales reports through the month were mixed to weaker, implying that any tax rebate boost was fading.
• Tying all this together delivers a hefty 1.0% jump in total sales, though ex auto sales will be sharply negative and ex autos & gasoline about flat.

Westpac Institutional Bank
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Disclaimer

All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.