Australian retail sales were surprisingly subdued in January while the nation's current account deficit blew out to a record last quarter, perhaps suggesting a rate hike expected later on Tuesday might be the last for a while.
The Reserve Bank of Australia (RBA) holds its monthly board meeting on Tuesday and is still seen almost certain to lift interest rates by 25 basis points to 7.25 percent, the highest since July 1996 and the second hike in as many months.
However, a flat reading for retail sales in January surprised analysts who had looked for a rise of 0.4 percent or more and suggested consumers could finally be bowing before rising fuel and borrowing costs.
"What it implies is that domestic spending is quite susceptible to higher interest rates," said Stephen Roberts, director of research at Lehman Brothers. "It makes it less likely the RBA will need to do too much more than what we'll see today."
Investors seemed to suspect something similar and the Australian dollar fell around a quarter of a U.S. cent after the data, while bill futures priced in slightly less risk of a further tightening to 7.5 percent.
"That's the second straight month where sales have decelerated so it does seem that some of that interest rate pain is starting to feed through into sales," noted Stephen Walters, chief economist at JPMorgan.
However, he also noted that much of the weakness was concentrated in food, while sales at department stores and recreational retailing enjoyed a healthy month.
"Food prices were down, which looks to be the main driver of the weak number," said Walters. "The discretionary part of retailing wasn't that bad."
In any case, some cooling in domestic demand was just what the central bank wanted to restrain inflation, which accelerated to a 16-year peak last quarter.
So strong was demand in the fourth quarter of 2007 that it sucked in imports and widened Australia's current account deficit by 18 percent to a record A$19.35 billion (US$18.1 billion).
That was well above the A$18 billion expected by analysts and implied trade subtracted a whole percentage point from gross domestic product (GDP) growth last quarter, much more than the 0.6 percentage point expected by the market.
The GDP report is due out on Wednesday and analysts had been looking for a solid rise of 0.8 percent in the fourth quarter, leaving growth for the year at a brisk 3.9 percent.
"We didn't expect such a disastrous current account deficit," said Stephen Halmarick, co-head of market economics at Citi. "The deficit will take more from growth than many thought, so some are likely to be revising down their GDP forecasts for tomorrow."
The drag from trade was balanced somewhat by a strong quarter for public spending, which rose 2.4 percent in the fourth quarter, twice the pace that had been forecast.
The outlook for the trade deficit had also been brightened by expectations of huge price rises for iron ore and coal, Australia's two most valuable exports.
The government's bureau of agriculture on Tuesday forecast export earnings from commodities would jump by almost a third in the year to June 2009, hitting a record A$189 billion.
"Overall, today's data continue to suggest the economy turned the year with reasonable momentum," said Scott Haslem, chief economist at UBS. "The RBA has stated that demand needs to slow significantly, so it would not necessarily view its job as being done based on this data alone," he added.