A week away from the first Reserve Bank of Australia (RBA) monetary policy meeting in 2013 and our view remains that further official interest rate cuts are unlikely. Our rate view balances increasing evidence that key overseas economies such as the US and China are improving, against slightly softer than expected local economic readings with relatively contained local headline CPI inflation. If the global economy is starting to strengthen, what softness there is in Australian economic growth may prove to be short-lived in our view. Moreover, low Australian headline inflation is mostly a function of the strong Australian dollar holding down the prices of imported goods. The prices of domestically produced goods and services, in contrast, are inflating at close to a 4% annual rate. If the RBA continues cutting the cash rate it risks adding to the rebound in Australian growth as global growth improves and adding to domestic inflation pressures already running well above its 2-3% inflation target band.

Readings of the US economy were mixed over the past week, but with important upside surprises for growth prospects in the weekly initial jobless claims data, much lower than expected for a second consecutive week a marker of an improving employment market and in December durable goods orders, up a much stronger than expected 4.6% in the month, with indications of an unexpected sizable lift in business investment spending in the month, despite the uncertainties associated with the fiscal cliff negotiations at the time. Also on the positive side of the ledger, the leading indicator of US manufacturing activity, the PMI manufacturing index lifted on flash estimate in January to 56.1 from 54.2 in December extending further into expansion territory marked by any reading above 50. US listed companies also continued to report mostly better than expected earnings for Q4 2012, with 75% of the 172 S&P 500 companies that have reported so far beating analysts’ expectations.

The various readings of US housing activity in December that were released over the past week were, in contrast, a little disappointing. Existing home sales, new home sales and pending home sales each fell in the month respectively by 1.0%, 7.3% and 4.3%. The big fall in new home sales was mostly because of major upward revision to the previous month’s reading lifting the rise in November to 9.3%. Also, a reason common to the falls in all three was the constraint of limited stock available for sale. For example, the stock of existing homes was down to the equivalent of 4.4 months of sales in December. Another marker of the tightening housing market is that the median price of existing homes was up by 0.8% in December and up by 11.5% compared with December 2011. On balance, the US economy is brightening much more than was commonly expected at the end of 2012 and the 5.2% lift in the S&P 500 in January so far bares testimony to that improvement.

Elsewhere overseas, limited data readings in China over the past week point to further expansion in manufacturing activity. More expansionary economic policies are being pursued in Japan and at the heart of the euro-area the January German IFO business index was stronger than expected at 104.2, the third consecutive monthly improvement and an indication that Europe’s biggest economy is improving.

The only Australian economic reading of note overthe past week was the Q4 2012 CPI, up a lower than expected 0.2% in the quarter and lifting the annual headline CPI inflation rate to 2.2% from 2.0% in Q3. Splitting the CPI between items produced overseas (tradables) and items produced domestically (non-tradables) showed readings of -0.4% and +0.7% respectively and annual changes of -0.4% and +3.9% respectively. In short, inflation is already comparatively high for domestically produced goods and services, another reason, apart from the improving global growth outlook, for the RBA to hold the cash rate unchanged at 3.00%.