Recent international and local data releases continue to support Laminar Group’s out-of-consensus view that the RBA has finished reducing the cash rate. More evidence is accumulating a modest improvement in the global economic outlook.

In the US private sector employment is rising (private sector payrolls up 168,000 in December after increasing 171,000 in November), banks are lending more freely (consumer credit rose a stronger-than-expected $US16bn in November after increasing $US14.2bn in October) and the leading index of manufacturing activity, the December ISM survey is back above the expansion/contraction line at 50.7. Not all recent US economic readings have been strong, the international trade deficit in November widened much more than expected to -$US48.7bn from -$US42.1bn in October, but while the deterioration in the trade account will limit US GDP growth in Q4, the detail of the deterioration is more consistent with strengthening demand down the track. US export rose by 1.0% m-o-m in November, while imports jumped by 3.8% led by demand for consumption good imports.

Recent economic indicators out of China, Australia’s biggest trading partner, have also been consistent with the beginnings of growth acceleration from the soft patch in mid 2012. China’s exports accelerated sharply to 14.1% y-o-y in December (the consensus forecast among China analysts was only 5.0%) from 2.0% in November. Iron ore prices in China are now up almost 100% from their September 2012 lows.

Even in world’s key economic soft spot, the euro-area, the head of the ECB, Mario Draghi, indicated a more stable outlook for problem sovereign bond markets extending to an improving economic outlook by the end of 2013. In Australia, recent economic readings have been mixed, soft retail sales, -0.1% m-o-m in November, but rising November home building approvals, up by 2.9% m-o-m. Rather like the US, Australia’s international trade deficit widened in November to -$A2.6bn in November from -$A2.4bn in October, but with exports and imports both rising by respectively 1.0% and 2.0%. Interestingly, much of the lift in imports related to rising capital goods imports, a sign that the mining investment boom may not be moderating as much as the RBA expected in its quarterly assessment of the economy issued in November.

With more signs evident of improving global economic activity over the past month, the US working through fiscal cliff issues and some further easing of European sovereign debt concerns we expect that the RBA will view Australian monetary conditions as already being as easy as they need to be to deal with the mixed signals from the Australian economy. We reaffirm our view that the cash rate is likely to be stable at 3.00% through 2013 ahead of a policy tightening phase starting early in 2014 as economic conditions globally and in Australia mostly firm over the next 12 months.