The Week Ahead: Lest We Forget

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By Greg Peel

It’s a short week in Australia and New Zealand with the Anzac Day celebration on Friday. We have been waiting for the March quarter CPI for three months now, and it will be released on Wednesday. However, the tension has eased.

Economists are expecting a March quarter increase of 1.1-1.2% which will eclipse the December quarter rise of 0.9% and take the annual inflation rate over the 4% mark. The core rate is expected at 0.9% to take the RBA’s preferred measure to 3.8%, or 0.8% above “comfort”. If it weren’t for the RBA’s recently instituted policy of commenting on “no change” decisions and of releasing the minutes of its board meetings a couple of weeks later then we might have been holding our breath on Wednesday.

As it is, the initial hints picked up in the decision statement were solidly ratified in the accompanying minutes. The RBA feels its tightening policy is now showing signs of slowing demand as intended, and that the additional lending rate increases from banks should be enough to alleviate the need for another tick up to 7.5%. Prior to this revelation, economists were mostly predicting one last rate rise but it is now understood the RBA is braced for a strong CPI on Wednesday and is putting its faith in the slowing economy to bring down inflation on its own. Eventually.

With oil hitting US$117/bbl on Friday the eventual ease in inflation hoped for just keeps getting pushed further into 2009. And now we learn that NSW premier Morris Iemma – the first premier in NSW history to become a lame duck only six months into a four year term – is set to introduce a mandated ethanol blend for the state’s petrol. The UK has just done the same. Regardless of all the scientific evidence suggesting ethanol reduces performance and does little to reduce greenhouse emissions, Iemma and fellow lame duck Gordon Brown have decided to take their constituencies down the US path to reduced food production and even higher food prices, just so they can look like good little green-friendly pollies substituting biofuel for petroleum to thus appease the ignorant. Good one. We won’t discuss just who wrote the book on ignorance.

The collapse in consumer and business confidence noted in Australia this month mirrors that of the US. These are usually reliable indicators of a recession, however while the US is seeing profit margins, real wages and house prices tumble Australia is looking at surging commodity prices, ongoing full employment, robust real incomes and burgeoning housing demand – all of which suggest that Australia’s economy will slow but certainly not recede. Adding to this prediction is the stronger than expected quarterly GDP growth released in China last week. (Just how is this inflation meant to come down, by the way?)

We get a precursor on Monday in Australia with the release of the first quarter PPI. A big jump in wholesale prices not reflected in retail (CPI) prices will indicate profit margins have shrunk as retailers are unable to pass through higher prices to reluctant consumers. This is exactly what has happened in the US, and while Wall Street is looking strong again one wonders how long falling profits can translate into higher stock prices.

Monday also sees the release of March new vehicle sales in Australia, while Wednesday brings April skilled vacancies along with the CPI. That’s it for the week before we break to remember the fallen.

The US starts its economic week on Tuesday with the February house price index and March existing home sales. So accustomed has the market become to weak housing numbers they are more likely to provide potential upside if they’re not devastating than downside if they are. Tuesday also sees the Richmond Fed manufacturing index.

Likewise for the March new home sales on Thursday, but the March durable goods orders number might be a different kettle of fish. Nevertheless, Wall Street will get a boost if the number is not really, really bad. Thursday is also weekly jobless claims while Friday wraps up with the Michigan Uni consumer confidence measure for April.

Canada makes a rate decision on Tuesday while New Zealand is expected to leave its rate unchanged on Thursday.

On the stock front it’s a busy week for AGMs and quarterly production reports. The two of note will be the Rio ((RIO)) AGM and the BHP ((BHP)) production report. All the details are available in the FNArena calendar.

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