November Outlook

The month of October began with risk assets cock-a-hoop. The start of November saw them tone down the euphoria. Mixed signals from the US data, or more correctly the return of two-way volatility after the linear advance associated with the much remarked upon “sweet spot” or “sugar rush” seemed to give investors pause for thought. The RBA and the Norges Bank have begun the policy normalisation process, but they are a long way ahead of any of the G7 central banks, who have all recently affirmed their determination to maintain ultra accommodative positions. This observation reflects the increasingly bifurcated global economy, with China and its tributaries on one trajectory, and the majority of the developed world on another. Amidst a general firming of prospects, we have revised our world growth forecast for 2010 up to 3% from 2.4% previously.

Australia: The Reserve Bank raised interest rates by 25bps to 3.5% in November. The move was accompanied by a non-commital statement. Our view is that the flow of data in the upcoming inter-meeting period will be sufficiently robust to precipitate a further move in December. Abstracting from the immediate path of rates, we see the RBA pausing in mid 2010, contrary to market expectations of a tightening cycle that sustains itself through the second half of next year. We highlights the risks of overtightening in a research piece on page 10, where we illustrate the heightened sensitivity of households to interest rate rises.

Soruce: Westpac November Outlook