Australia & NZ weekly

Week beginning 14 June 2010

Australia: consumer optimism fades.

RBA focus: June meeting minutes and Battellino speech this week.

Australian data focus: short week with WBCMI Leading Index, housing starts &
motor vehicle sales.

NZ data: REINZ house sales & prices, consumer confidence & retail sales
previewed.

US data focus: import prices, NY & Philly Fed surveys, PPI, CPI, housing starts
& permits, industrial production & current account due.

US Fedspeak: Bernanke & Plosser giving speeches.

Key economic & financial forecasts.

Information contained in this report was current as at 11 June 2010

Economic Research Sydney +61 2 8254 8720 economics@westpac.com.au New Zealand +64 4 470 8255 London +44 20 7621 7061

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. 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. Westpac's financial services guide can be obtained by calling 132 032, 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 registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac
Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@
westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. 2010 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.
 Westpac weekly

Consumer optimism fades

The June WestpacMelbourne Institute Consumer Sentiment
Survey released this week shows a marked shift in the consumer.
The widespread optimism apparent at the start of the year has
evaporated, giving way to a much more sombre mood. The headline
Index has fallen 15% since January and by over 12% in the last two
months alone. While at 101.9, it remains in slight positive territory
overall a reading over 100 indicates that optimists still outnumber
pessimists the momentum is all one way.
These sorts of shifts should not be ignored. Consumer sentiment has
provided critical early warning signs in the past. Most recently, it was
the first indicator to show a decisive weakening in 2008, with a 20%
slump in the Index early in the year followed by an abrupt slowdown
in spending (after rising 5.3% in 2007, consumption growth basically
stalled flat in 2008). Of course, the backdrop was somewhat bleaker
back then mortgage rates had been pushed to an eye-watering
9.35% with core inflation running at an alarming 4%+ rate, petrol
prices surging through $1.40/litre and the global financial crisis
worsening with the Fed-brokered rescue of Bear Stearns. The starting
point for sentiment was also lower with the larger decline taking the
Index to levels only seen in the past during Australian recessions.
Rather than a 2008-style collapse, the decline in sentiment in recent
months has been more of a cooling-off from previous highs. It
bears more resemblance in both magnitude and level terms to the
weakening in sentiment in early 2005 a decline that was followed
by a moderation in consumption growth from above average
(4.3%yr in 2004) to slightly below average (2.9%yr in 2005).
There is more to the comparison with 2005. In both cases the initial
trigger was an interest rate rise that took mortgage rates over the
key threshold rate of 7%. For consumers, this seems to be the
point at which rates start to 'bite' with a more pronounced negative
reaction in sentiment to rate rises.
Reasons for concerns with the global economy are best exemplified
by the 6.2% fall in the sharemarket and the 7c fall in the AUD
since the last survey both following substantial declines over the
previous month.
It isn't possible to tell how much of the decline in the Consumer
Sentiment Index is due to these different issues. However, there are
some clues from the components of the Index. The dominant mover
was how respondents assess their personal finances relative to a year
ago which fell by 17.7% the biggest fall since 2005 when petrol
prices soared in the wake of Hurricane Katrina. This suggests the
main negative came from an actual hit to finances, i.e. higher interest
rates and declining share prices, than from the threatened hit from
other factors. Notably, though this component index is well below
its long run average, it is still well above the lows printed during the
global financial crisis in 2008 and the early 90's recession.
Movements in other components were more subdued. Expectations
for economic conditions over the next 5 years dropped 9%,
swinging from a small positive to a small negative, and expectations
for family finances over the next 12 months fell 4.2%. These
components are most likely to be capturing sentiment on economic
conditions, global growth prospects and tax issues but also the
outlook for interest rates. On rates, an additional question on
expectations for mortgage interest rates shows that although
consumers are less hawkish than they were in February, over 90%
still expect more rate rises in the year ahead.
What does this all mean for consumer demand? Clearly a more
downbeat consumer is bad news for retailers, but it may not be as
bad as the headline suggests. Although sentiment surged to historic
highs last year, consumers never followed through in terms of actual
spending, which has remained lacklustre over the last nine months.
As such, there may also be less of a moderation.

That said, 7% seems to be the point where rates 'bite' but not
necessarily where they really 'hurt'. Over the last tightening cycle,
sentiment usually staged a partial rebound the month after a rate-
hike-induced fall.
Indeed, what makes the June drop in sentiment interesting is that it
followed a decision by the RBA to leave rates on hold. Other factors
are clearly at play. Instead of rate concerns, the fall in June seems to
reflect a mixture of concerns about deteriorating conditions abroad,
financial market turmoil and uncertainty around the Governments
proposed Resource Super Profits Tax.
This seems to be the message from the component Index on
whether now is a good time to buy a major household item. This
Index, which has been shown to have the closest correlation to
actual spending, never rose as high as headline sentiment in 2009
and has not fallen back as far over the last two months (5.6% vs
the 12% fall in the headline index). A US Fed chairman from the
1960s once famously said a central bank's job is to take away the
punch bowl just as the party gets going. The RBA, it would seem,
has taken it away before consumers had barely had a drink.
Matthew Hassan, Senior Economist

We know this from responses to additional questions included in Consumer Sentiment

the March, June, September and December surveys. These cover
whether respondents can recall news items on a range of subjects index index
30 30
and whether these were viewed favourably or unfavourably. The
20 20
most recalled items usually relate to interest rates and domestic and
international economic conditions. In June though, the most recalled 10 10
items related to the categories: 'Budget and tax' (55% recalled these 0 0
items, the highest proportion since the GST introduction); 'Economic -10 -10
conditions' (48%); 'Interest rates' (34% down from 44% in March); -20 -20
and 'International conditions' (32% recall, the highest since the Asian -30 'time to buy a major household item' -30
crisis in 1997-98 and eclipsing readings registered during the global -40
consumer sentiment
-40
financial crisis). In every case the news heard was viewed as more -50 -50
*deviation from long run average
unfavourable in June than it was in March. -60 -60
Sources: Westpac Economics, Melbourne Institute
-70 -70
Jun-90 Jun-95 Jun-00 Jun-05 Jun-10

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.
2

Data wrap
May ANZ job ads
Newspaper job ads fell 6.5% in May. This fall was sufficient
to halt an eight month uptrend in newspaper ads, with the
trend now in decline since February. However, the weakness in
newspaper ads was more than offset by a 5.0% rise in internet
ads. Consequently, combined total job ads rose 4.3% in May
after a 1.2% fall previously, maintaining their uptrend for the
10th consecutive month with trend growth in May at +2.2%mth
and +23.8%yr (vs +3.0%mth and +14.9%yr prev).
With ads a flow variable and employment a stock, we use trends
in the level of total job ads as a guide for future jobs growth
momentum. We compare that level of trend job ads to a longer
run trend (2 year moving average), expressed as a % deviation
from that longer run trend, which historically has provided
a seven month lead for annual jobs growth. This detrended
measure of job ads improved further to 13.4% in May from
16.7% in April and a much weaker 42.9% low in July 2009.
Having troughed much earlier and more resiliently that job ads
had implied in July 2009 at 0.1%yr, employment growth has
subsequently accelerated rapidly to +2.2%yr in April 2010. With
the continued improvement in our detrended measure of job
ads, it continues to signal an ongoing acceleration in annual
jobs growth. Indeed, our projected detrended job ads measure is
suggesting that acceleration can continue through 2010/11. We
retain our forecast for jobs growth to accelerate to 3%yr through
2010, and remain strong through 2011H1 at around 2.9%yr.
May NAB business survey
Business confidence was the big mover in the month, declining
to a still positive reading of 4.6pts from 12.5pts in April. This,
the softest read since last June, is now a little below the long
run average (of +7pts).
It would appear that the announcement of the resource rent
tax was a major factor, with mining sector confidence plunging
by 30pts to a reading of +4pts. The survey also reported that
confidence fell in wholesale and in manufacturing.
Business conditions eased by 2pts to 6pts, a reading that is
broadly consistent with 4% annual demand growth. Of the
three sub-indices, trading and employment conditions were
broadly unchanged. However, profitability was weaker.
By industry: conditions in mining and construction were
up strongly, but recreation, finance and wholesale were
down sharply. Business conditions are strongest in mining,
construction and transport, and weakest in retail.
Jun WBCMI Consumer Sentiment
The WestpacMelbourne Institute Consumer Sentiment Index
fell by 5.7% in June from 108.0 in May to 101.9 in June.
Following the 7% fall in May, the cumulative 12.3% fall in the
Index over the last two months represents the largest two month
fall since Mar08. At that time the Reserve Bank had raised rates
on two consecutive occasions pushing the variable mortgage rate
to 9.35% and the global financial crisis was deepening.
The fall in May was largely due to the RBA's third consecutive
rate hike of the year. With rates left on hold in June, this
month's fall in sentiment is unlikely to be due to interest rates.
Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.
Westpac Weekly
It likely reflects a mixture of concerns about deteriorating
conditions abroad, financial market turmoil, and uncertainty
over the proposed Resource Super Profits Tax. Responses on
recalled news items supports this conclusion.
Reasons for concerns with the global economy can be best
exemplified by the 6.2% fall in the sharemarket and 7 cent
fall in the AUD since the last survey.
Apr housing finance
Housing finance to owner-occupiers weakened in April, falling by
1.8%. The reduction of stimulus is understandably dampening
demand for finance. The RBA began normalising interest
rates in October and the additional bonus under the Federal
Government's First Home Buyer (FHB) scheme was phased out
between October and December.
The impact on the owner-occupier segment is material and is
an argument for the RBA shifting to a "pause" - at least until
the next inflation update. Finance approval numbers to owner-
occupier are now down 26% in seven months. The risks for the
near-term are skewed to the downside. Although, it was notable
that new lending (ie ex-refinancing) was broadly flat in April,
down just 0.5%.
The weak aspect was finance for the construction of new
dwellings. Lending to owner-occupiers for this fell 4.8% in the
month, to be down 30% over the last six months, while lending
to investors for construction appears to be going broadly
sideways. This suggests that while housing construction will
experience an upswing over the second half of 2010 and into
early 2011, given the existing strong pipeline of work, prospects
are for a moderation in activity to emerge during 2011.
The major strength in the report is further confirmation that
the housing cycle is evolving, as is to be expected. While
owner-occupier finance retreats from historic highs, investors
are returning to the market in greater numbers. Investor finance
rose 1.8% in April, to be up 39% since the start of 2009. At
this stage the focus for investors appears to be more in the
established market than in developing new housing projects.
The greatest adjustment, in the upswing and now in the
downswing, has been in the FHB market. Finance approval
numbers to FHBs were broadly flat in the month to be down
58% since May and 15% below the August 2008 low.
Upgraders have been impacted by the heat coming out of
the FHB market and rising interest rates. Finance numbers to
Upgraders, also broadly flat in the month (ex-refinancing), are
down 13% over the last seven months.
Jun WBCMI unemployment expectations
Consumers' unemployment expectations rose for the second
consecutive month in June, confirming the commencement
of an uptrend since February 2010. However, their trend level
remains a substantial 38.4% below the February 2009 peak.
The unemployment expectations index rose 7.7% in June to
120.33 following a 8.5% rise previously. Trend growth has risen
to +2.5%mth and 30.8%yr from +2.1%mth and 36.0%yr
previously. We assess this index via a smoothed trend deviation
from its full history average as a guide for annual employment
3
 Westpac Weekly

Data wrap

growth seven months ahead. With the new uptrend in the index,
that deviation measure increased for the third consecutive
month, to 11.0% in June from 15.4% in May, up from a trough
of 18.1% in March.
The deviation measure of unemployment expectations remains
consistent with an ongoing acceleration in annual jobs growth
through 2010 to around 3%yr from the current 2.2%yr trend
pace, in line with our prognosis. However, the rise in the
deviation measure over the last three months implies an easing
back in annual jobs growth into 2011 to below 3%yr. That also
remains consistent with our Westpac forecasts which have
annual jobs growth peaking in 2010Q3 at 3.0%yr, easing a
touch to 2.9%yr in 2010Q4 and remaining at that slightly more
moderate pace in 2011H1.
Jun MI inflation expectations
Consumers' inflationary expectations eased in June to 3.4% from
3.6%, sufficient to stall their renewed uptrend since January
2010, but at an above average level. From 3.41% in January,
trend consumers' inflationary expectations have risen to 3.59%
in June, well above their inflation targetting period average
of 3.16%. In June, some encouragement was seen with the
proportion expecting inflation within the 2% to 3% target zone
rising to 17.5% from 16.2% previously, back above its twelve
month average of 17.3%. Inflationary expectations of managers
and professionals rose to 3.9% in June from 3.5% in May, but
they have trended down over the last five months to a trend
level of 3.59%, the same as the consumers' trend level.
Our composite of business survey employment indices, the
LDI, is now sitting at a level consistent with ongoing smoothed
jobs growth of around 20k per month. A key feature of todays
data was a 2.6%mth spike in derived average hours worked
(sadj), sufficient to restore a rising trend. But considerable
spare capacity remains, with their trend level still 2.2% below
their mid-2008 peak. This also argues for continued moderate
monthly jobs growth as average hours do more of the work.
This continued moderate pace of monthly jobs growth will
still see annual trend growth rise to 3%yr through 2010H2,
consistent with medium term leads from job ads (still trending
up solidly) and lagged domestic demand growth. Indeed, while
monthly trend jobs growth slowed, annual trend growth rose in
line with our prognosis to 2.5%yr from 2.3%, the highest since
April 2008.
The impact of the jobs gain on the unemployment rate was
boosted by a 0.2ppt fall in the participation rate to 65.1%
from 65.2% (from 65.24% to 65.09%). This saw weak labour
force growth of 1.5k, allowing the 26.9k jobs rise to cut the
unemployment rate 0.2ppts to 5.2% (consensus 5.4%, Westpac
& bottom of the range 5.3%). The trend rate also fell to 5.2%
after three months at 5.3%. We continue to expect moderate
jobs growth and rising labour force growth to leave the
unemployment rate downtrend very gradual, taking it to 5.0%
by end 2010.

May labour force

Employment rose 26.9k in May after a 35.3k gain previously,
again above consensus (+20k). The breakdown was strong, with
full-time jobs up 36.4k, their ninth straight rise. Nonetheless,
monthly trend jobs growth has eased over the last six months
to 18.4k from a Nov-09 peak of 35.0k, in line with our view
that monthly trend jobs growth should remain on this more
moderate path over 2010 as the spare capacity in the existing
workforce is utilised.

Round-up of local data released last week

Date Release Previous Latest Mkt f/c
Mon 7 Jun May ANZ job ads 1.2% 4.3%
Tue 8 Jun May NAB business survey: business conditions +8 +6
Wed 9 Jun Jun WestpacMI Consumer Sentiment 108.0 101.9
RBA Governor Stevens speech
May housing finance 2.9% 1.8% 2.0%
Thu 10 Jun May employment chg 35.3k 26.9k 20k
May unemployment rate 5.4% 5.2% 5.4%
Jun WBCMI unemployment expectations 8.5% 7.7%
Jun MI inflation expectations 3.6% 3.4%

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

4

New Zealand: week ahead & data wrap
One down ...
In a week chock full of data, the key event was the RBNZs 25
basis point OCR hike. The accompanying statement made it clear
this should be seen as the first step in an extended series of rate
hikes: we have decided to begin removing some of the monetary
policy stimulus that is currently in place. The debate from here
on will be around when and how much: The further removal of
stimulus will be reviewed in light of economic and financial market
developments.
The RBNZs projection for 90-day interest rates showed the cash
rate rising to 5.5-6.0% over the next few years. Thats not quite
consistent with a 25bp hike at every review date for the next couple
of years but its not far off. The RBNZ is now confident that the
economy is normalising, which implies that monetary policy settings
should do the same. Theres an element of rebalancing going on, so
the recovery isnt being felt in all parts of the economy: household
spending and credit growth are still subdued, and firms stated
intentions to increase investment are not yet being acted upon.
But on the plus side, the growth outlook for our major trading
partners has continued to improve, and export commodity prices
have reached new highs. This boost to export earnings is expected
to eventually flow through to income growth in other parts of the
economy.
The market was perhaps surprised by the RBNZs relative comfort
about the recent financial market ructions related to Europes
sovereign debt woes though it had said as much in the Financial
Stability Report last month. While the RBNZ highlighted this as a
substantial downside risk, the only impact on its central projections
was in terms of the knowns: a downward revision to already-weak
growth forecasts for Europe, and a rise in bank funding costs that the
RBNZ assumes will be sustained.
The other reason for raising rates now is the inflation outlook.
Recent government policies the GST increase, the Emissions
Trading Scheme, and several rounds of tobacco excise hikes will
add 2.8 percentage points to the inflation rate at their peak early
next year. As a consequence, the RBNZ expects annual inflation
to reach 5.3% in June 2011, then moderate to around 2.7% in the
latter years of their forecasts. The initial spike can be ignored, but
the risk is that high inflation could feed into wage- and price-setting
behaviour over the medium term, causing an ongoing inflation
dynamic. Once inflation expectations become embedded they can
be difficult to squeeze out, and the RBNZs own survey indicates
Round-up of local data released last week
Date Release
Tue 8 Jun Q1 building work put in place
Q1 real manufacturing sales s.a.
Thu 10 Jun RBNZ Monetary Policy Statement
Q1 terms of trade
May electronic card transactions
Fri 11 Jun May food prices
Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.
Westpac Weekly
that medium-term inflation expectations have already risen back
towards the upper end of the 1-3% target range. The RBNZ appears
to have adopted a cautious approach, running more with hawkish
monetary policy as a hedge against the possibility of higher inflation
expectations. This was expressed in their forecasts, which featured
higher interest rates, a higher exchange rate, and higher bank funding
costs, all of which cause lower economic growth and lower inflation
once the effect of GST and other policy changes have washed out.
That may well prove to be a prudent decision.
Other data over the week set a generally disappointing tone. In
Tuesdays Q1 Quarterly Survey of Manufacturing, manufacturing
sales declined 2.7%, mainly due to a 10.3% decline in dairy and meat
product manufacturing. Ex-meat-and-dairy manufacturing sales
were up only 1.3%, and production was probably flat. Building work
put in place rose 0.7% in Q1, again slightly weaker than expected.
Residential building work pick up by a modest 2.0%, while the
shake-out in non-residential construction continued with a further
0.8% decline. We are still finalising our Q1 GDP forecast, but these
data point in the direction of a significant downward revision to our
current forecast of 0.8%.
The Q1 Terms of Trade rose by a phenomenal 5.9%, as last years
booming dairy prices finally hit the official figures. Another rise in Q2
is expected to propel the terms of trade to a new three-decade high.
The Overseas Trade Index showed that import volumes were weaker
than expected at 2.8%, while export volumes rose 3.0%, suggesting
net exports will make a solid contribution to Q1 GDP growth. This
was further confirmation of the weak consumer / strong export
dynamic that has characterised the NZ economy throughout 2010.
The weak consumer was in evidence yet again when May electronic
card transactions rose only 0.2% after a sharp fall in April. And
rounding out the weeks data, food prices fell by 0.7%, a large
enough surprise to have us revising down our Q2 CPI forecast from
0.5% to 0.4%. It looks as though the strong exchange rate is being
passed though relatively quickly into lower consumer prices.
Next week is a little less busy on the data front. We expect ongoing
weakness in the housing market to show up in the REINZs sales and
price figures. Wednesdays Westpac McDermott Miller Consumer
Confidence survey will be an interesting test of how consumers have
interpreted the budget. And the April Retail Trade Survey is expected
to exaggerate the underlying trend of consumer weakness due to the
timing of Easter.
Previous Latest
1.2% 0.7%
2.7% 2.7%
2.50% 2.75%
5.8% 5.9%
1.1% 0.2%
0.5% 0.7%
5
 Westpac weekly

Data previews

Aus Apr WestpacMI Leading Index Westpac-MI Leading Index

jun 16, Last: 8.7% annualised
% ann % ann
12 12
The WestpacMelbourne Institute Leading Index continued six month annualised growth rate
riding high in March. The annualised growth rate in the index 9 long term trend 9
a guide to the likely pace of activity over the following three 6 6
to nine months was 8.7%, a long way above its long term
trend of 2.8%. 3 3

Despite a rapid deterioration in financial markets since May, 0 0

the Index's monthly components were still fairly mixed in -3 -3
April. Equity markets registered a mild fall, the ASX down recession
-6 -6
1.4% after a 5.1% bounce in March (it has fallen another 8.8% Sources: Westpac-Melbourne Institute
since then); dwelling approvals slumped 14.8% but this was -9 -9
just a partial unwind of March's 16.8% jump; money supply Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09
growth fell back from the fairly rapid 1.5% registered in March
to a more subdued 0.4% in April; but growth in US industrial
production picked up from 0.2%mth to 0.8%mth.

NZ Apr retail sales NZ nominal retail sales

Jun 14, Last: 0.5%, WBC f/c: 0.5%
% chg % chg
12 12
We expect April retail sales to reverse the gains made in March.
10 10
The early timing of Easter this year meant that the usual pre-
8 8
Easter spending boost was brought forward into March, while
6 6
April experienced the lull of the Easter period itself.
4 4
Looking beyond this timing effect, the underlying trend in retail 2 2
spending remains soft. We estimate that total sales fell 0.5% 0 0
in April, with core sales down 0.7%. The continued rebound in -2 -2
vehicle sales is likely to be one of the few saving graces. -4 -4
-6 Monthly s.a. Annual -6
The New Zealand consumer is going through a soft patch, Source: Statistics NZ
-8 -8
while the goods-producing sectors are currently providing more Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
of the growth momentum. We still expect to see a revival in
spending later in the year, once the pickup in activity starts to
translate into income growth.

NZ May REINZ house price index REINZ house prices

Jun 15, Last: 6.2% yr
ann % chg ann % chg
25 25
The April REINZ report indicated a lacklustre housing market,
with house sales still 4.3% below the December 2009 level, 20 Old series 20
prices declining, and days to sell lengthening. 15
New series (stratified)
15
With at least some of the recent weakness likely related to tax 10 10
uncertainty surrounding Budget 2010 (which was released on
May 20), we expect the May housing data to reveal a similar 5 5
subdued picture. 0 0

Looking forward, the tax changes in the Governments 2010 -5 -5

Budget were a clear negative for house price growth in Source: REINZ
-10 -10
the short term. Thus, while there could be a surge in sales Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
over coming months as people reorganise their affairs to
reflect their changed tax position, we do not anticipate an
improvement on prices.

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

6
 Westpac weekly

Data previews

NZ Q2 consumer confidence NZ Consumer Confidence

Jun 16, Last: 114.7
index index
140 140
Consumer confidence moved modestly lower in the March
2010 quarter, but at 114.7 remained at a high level. A 130 130
reassessment of future conditions drove the decline, while 120 120
consumers assessment of current conditions actually
improved. 110 110

100 100
Economic news has been a bit of a mixed bag in recent months,
but on the whole we expect the good to outweigh the bad. 90 90

On the upside, unemployment has fallen sharply, high business 80

Source: Westpac McDermott Miller
80
confidence points to further improvements in the labour 70 70
market, Fonterra has indicated a near-record payout for Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
farmers in 2011, and the Governments 2010 Budget included
$15bn of income tax cuts over the next four years.
On the downside inflation is spiking, and the near term outlook
for house prices is weaker.

US Jun NY and Philly Fed surveys US manufacturing surveys

Jun 15, New York Fed: Last: 19, WBC f/c: 24
Jun 17, Philadelphia Fed: Last: 21, WBC f/c: 17 index index
60 70
Sources: Factset, Westpac Economics

Both these regional Fed factory surveys surged in the second 40

60
half of 2009, the NY index peaking at 33 (highest since 2006)
in Oct and Philly at 23 (highest since 2005) in Dec. Since 20
50
peaking, they pulled back a touch, then recovered in April back
0
to levels just shy of those late 2009 highs. However in May the
40
NY index fell nearly 13 pts whereas Philly rose a further point. -20
The softer NY Fed index could be an early indication that we -40
30
NY Empire State Philly Fed ISM mfg
are in for a period of slower industrial growth, as the impact
on activity of fiscal stimulus and inventory building wanes. The -60 20
Richmond and Dallas Fed factory indices also moderated in May-04 May-05 May-06 May-07 May-08 May-09 May-10
May. Hence we expect the Philly index to moderate in June.
However the scale of the NY Fed index's May decline, and its
inherent volatility, suggests that it will bounce in June, but
leave in place a downtrend that will continue in H2 2010.

US May PPI and CPI US price inflation

Jun 16, PPI headline: Last: 0.1%, WBC f/c: 0.9%
Jun 17, CPI headline: Last: 0.1%, WBC f/c: 0.1% %ann consumer producer* %ann
6 12
Sources: Factset, Westpac Economics
10
The PPI headline has recently been boosted by sharp food *right axis
4 8
price gains (due to recent weather damage to crops) on top
6
of persistent energy price rises and volatility in new auto and
2 4
truck prices (a big driver of swings in the core rate). But in April
2
food and fuel prices began to reverse, although the core rate
0 0
was held at 0.2% by higher auto prices. In May, fuel prices
-2
dumped and we expect that to drag the headline PPI down by
-2 -4
almost 1%.
CPI core CPI PPI core PPI -6
Despite pressure from some components of the PPI, there -4 -8
has been minimal pass-through to retail prices, as evidenced Apr-00 Apr-04 Apr-08 Apr-00 Apr-04 Apr-08
by flat to negative headline/core CPI outcomes this year.
Anecdotally, consumer goods firms say they have no pricing
power and are wearing higher costs via narrower margins. In
May, lower gasoline prices should weigh on the headline CPI
again and the third consecutive flat core rate is expected.

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

7
 Westpac weekly

Data previews

US May housing starts and permits US housing starts & permits

Jun 16, Starts: Last: 5.8%, WBC f/c: 5.0%
Jun 16, Permits: Last: 10.9%, WBC f/c: 0.0% units units
2400 Sources: Factset, Westpac Economics
2400

Housing starts jumped 6% in Apr, led by single family homes

2000 2000
(multiples fell sharply), but housing permits fell 11%, more
than eliminating permits previous lead over starts - perhaps
1600 1600
a sign that the end of the tax credit for homebuyers in April is
already impacting on future construction activity.
1200 1200
Assuming that is the case, then we expect a sizeable fall in
starts in May, of around 5%, with more declines to come 800 800
housing starts building permits
into mid-year, depending on the extent to which the tax
credit pulled activity forward. The May decline would be 400 400
steeper were it not for a likely bounce in the volatile multpiles Apr-90 Apr-95 Apr-00 Apr-05 Apr-10
component.
Housing permits likely have further to fall too, though the size
of the April pull-back means May could see temporary stability
particularly if the multiples component bounces.

US May industrial production US industrial sector: expansion mode

Jun 16, Last: 0.8%, WBC f/c: 1.2%
% change index
6 80
US industrial production rose a solid 0.8% in April, and the Sources: Factset, Westpac Economics

factory sector was even stronger at 1.0% - the difference due 4 70

to an ongoing contraction in utility output following the very
cold weather earlier in the year. 2 60

The factory ISM for May showed marginal slippage in the 0 50

production index but it remained at a very high level (66.6), in
-2 40
contrast to slippage in many of the regional factory surveys.
Industrial production, 3mth % chg (lhs)
April orders data were mixed outside of the transport sector -4 30
which was solid. Hours worked in the factory sector were up ISM production index (rhs)
an impressive 1.4% in May. -6 20
May-00 May-02 May-04 May-06 May-08 May-10
These factors point to a rise in industrial production in excess
of 1% but the orders and regional survey wobbles hint at some
downside risks, sufficient to prevent us from forecasting a rise
in output faster than the gain in factory hours worked.

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

8
 Westpac weekly

Key data & event risk for the week ahead

Market Westpac
Last median forecast Risk/Comment
Mon 14
Aus Queen's Birthday holiday Public holiday in ACT, NSW, NT, Qld, Tas, Vic and SA.
NZ Apr retail sales 0.5% 0.2% 0.5% Unwinding March gains; trend growth remains weak.
Inr Apr industrial Production %yr 13.5% 14.3% The manufacturing recovery has broadened of late.
Jpn Apr industrial production, final %yr 31.8 Initial weaker: also includes capacity utilisation measure.
Eur Apr industrial production 1.5% 0.6% 0.6% German IP known up 0.9% in April.
UK May consumer confidence 74 72 Tentative date for Nationwide index, due 13-17/6.
Can Apr auto sales 4.2% 5.0% 5.0% Guidance for Apr from StatCan is a 5% fall.

Tue 15
Aus RBA Deputy Governor Battellino speaking Sydney (12:30 AEST) to Financial Executives International of Australia.
Jun RBA Board meeting minutes On hold "near term" amidst global uncertainty; focus on int'l outlook.
NZ May REINZ house prices %yr 6.2% Uncertainty around tax changes still influencing market.
Jpn BoJ Policy decision 0.1% 0.1% 0.1% First meeting under Prime Minister Kan.
Eur Apr trade balance sa bn 0.6 Consistently in surplus since September last year.
Ger Jun ZEW economic sentiment 45.8 48.0 40.0 Analysts are surely even more concerned about prospects for 2010.
UK May RICS house price balance % 17% Bottomed at 9% in March: fewer surveyors expect higher prices.
May CPI %yr 3.7% 3.5% 3.5% Base effects and BRC shop price index point to lower annual rate.
Apr house prices %yr 9.7% Lesser watched DCLG measure.
US May import prices 0.9% 1.2% 2.0% Plunging oil prices to drive import prices lower.
Jun NY Fed factory index 19.1 20.0 24.0 Bounce from sharp May plunge but still well off its peak.
Apr net long term TIC flows $bn 140.5 Guide to extend/composition of current account deficit funding.
Jun NAHB housing market index 22 22 20 Homebuilder confidence waning as buyer tax credit impact fades.
Can Q1 productivity 1.4% 1.2% Strong GDP growth but jobs have been rising too.

Wed 16
Aus Apr WestpacMI leading index 6m anns'd% 8.7% Riding high in March but components became more mixed in April.
Q1 dwelling commencements 14.5% 7.0% 5.0% Already up 27% over 2009H2 but still 12% below Q1 approvals.
NZ Q2 consumer confidence 114.7 Indicators a mixed bag, but overall should support confidence.
Eur May CPI final %yr 1.6% a 1.6% 1.6% Core rate was just 0.8% yr in April.
Q1 labour costs %yr 2.2% Sharp deceleration in H2 2009.
UK May unemployment change 27k 24k 25k Recent declines reflect return to GDP growth but jobs still falling too.
US May producer prices 0.1% 0.5% 0.9% Sharp oil price declines to weigh on headline PPI, while core will continue
May PPI core 0.2% 0.1% 0.0% to be impacted by auto and truck price volatility.
May housing starts 5.8% 3.3% 5.0% April decline in permits suggests pull-back in post tax credit activity will
May housing permits 10.9% 2.9% 0.0% be fairly immediate.
May industrial production 0.8% 0.9% 1.2% Hours worked in factories up 1.4% in May. Business surveys solid.

Thu 17
Sing May NODX %yr 29.4% 25.1% Volatile biomed poses downside risks.
Eur Jun ECB monthly report Not usually market mover but these are interesting days!
UK May retail sales incl fuel 0.3% 0.0% Somewhat lacklustre since Jan-Feb volatility.
Jun CBI industrial trends survey 18 New orders measure. May was well improved on previous readings.
US May consumer price index 0.1% 0.2% 0.1% Gasoline prices drifted lower in May and with core CPI expected to be
May core CPI 0.0% 0.1% 0.0% flat for third month running headline CPI should fall again.
Initial jobless claims w/e 12/6 456k 453k 450k Initial claims downtrend appears to have stalled.
Q1 current account balance $bn 115.6 119.3 Trade deficit widening again but income and other flows not yet known.
Jun Philadelphia Fed index 21.4 21.0 17.0 Delayed replication of NY Fed's May decline.
May leading index 0.1% 0.4% April saw first LEI decline since April last year.
Can Apr wholesale sales 1.4% March rise reversed Feb fall.

Fri 18
Aus May Motor vehicle sales 8.4% 2.0% FCAI figs showed highest May sales on record but still imply dip on April.
Ger May PPI %yr 0.6% 0.7% April saw first positive annual % gain since Feb last year.
UK May mortgage approvals, major banks 47k Down from recent peak of 62k in Nov last year.
May PSNCR bn 8.8 Last figures ahead of June 22 "lifechanging" budget.
May M4 money supply %yr 3.3% Slowed from Feb 2009 high of 17.7% yr.
Can May leading index 0.9% Has not posted a decline since April last year.

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

9
 Westpac weekly

Economic & financial forecasts

Interest rate forecasts
Latest (June 11) Sep 10 Dec 10 Mar 11 Jun 11 Sep 11
Cash 4.50 4.75 5.00 5.00 5.25 5.50
90 Day Bill 4.90 5.00 5.20 5.20 5.50 5.75
3 Year Swap 5.28 5.50 5.90 5.90 6.10 6.25
10 Year Bond 5.39 5.60 5.90 5.90 6.00 6.00
10 Year Spread to US (bps) 209 220 240 190 180 150

International
Fed Funds 0.125 0.125 0.125 0.125 0.125 0.375
US 10 Year Bond 3.30 3.40 3.50 4.00 4.20 4.50
ECB Repo Rate 1.00 1.00 1.00 1.00 1.00 1.00

New Zealand
Cash 2.75 3.25 3.75 4.25 4.75 5.25
90 day bill 3.08 3.70 4.20 4.70 5.20 5.70
2 year swap 4.33 4.80 5.20 5.50 5.90 6.20
10 Year Bond 5.50 6.00 6.10 6.20 6.30 6.30

10 Year spread to US 220 260 260 220 210 180

Exchange rate forecasts

Latest (June 11) Sep 10 Dec 10 Mar 11 Jun 11 Sep 11
AUD/USD 0.8447 0.88 0.90 0.92 0.90 0.88

NZD/USD 0.6812 0.72 0.74 0.76 0.75 0.74

USD/JPY 91.59 92 95 98 102 105
EUR/USD 1.2106 1.22 1.22 1.18 1.18 1.16
AUD/NZD 1.2400 1.22 1.22 1.21 1.20 1.19

Australian economic growth forecasts

2009 2010 2011 Calendar years
Q3 Q4 Q1 Q2f Q3f Q4f Q1f 2008 2009 2010f 2011f
GDP % qtr 0.3 1.1 0.5 0.9 1.0 0.8 0.9
ann change 0.9 2.8 2.7 2.8 3.5 3.3 3.7 2.3 1.3 3.0 3.5
Unemployment rate % 5.8 5.6 5.3 5.3 5.1 5.0 4.8 4.2 5.6 5.1 4.8
CPI % qtr 1.0 0.5 0.9 0.8 1.2 0.4 1.0
ann change 1.3 2.1 2.9 3.2 3.5 3.3 3.4 3.7 2.1 3.3 3.1
CPI underlying % qtr 0.8 0.6 0.8 0.7 0.7 0.6 0.8
ann change 3.5 3.3 3.1 2.9 2.8 2.8 2.8 4.4 3.3 2.8 3.0

New Zealand economic growth forecasts

2009 2010 Calendar years

Q2 Q3 Q4 Q1f Q2f Q3f Q4f 2008 2009 2010f 2011f

GDP % qtr 0.2 0.3 0.8 0.8 1.2 1.3 1.2
Annual avg change 2.2 2.3 1.6 0.3 1.0 2.4 3.4 0.2 1.6 3.4 4.4
Unemployment rate % 5.9 6.5 7.1 6.0 6.1 5.7 5.5 4.6 7.1 5.5 5.0
CPI % qtr 0.6 1.3 -0.2 0.4 0.5 1.3 2.7
Annual change 1.9 1.7 2.0 2.0 2.0 2.0 4.9 3.4 2.0 4.9 2.6

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

10