Stocks Sizzle Down Under

All these factors have led to a reduction in the risk premium accorded to Australian long-bond yields -- the ultimate gauge of the effectiveness of Australia's efforts on structural reform and policy. We have seen spreads between long-dated bonds in Australia and the U.S. average just 1% in the decade between 1994 and 2004 compared to 3.5% in the prior decade.

Our assessment of the inflation outlook still points to core inflation approaching the top of the RBA's target band during 2005. That said, the better-than-expected September-quarter inflation data and some softer-than-expected real activity data recently mean the RBA probably has time to continue its wait-and-watch approach to policy-setting. Accordingly, our forecasts incorporate a final rate rise in the first quarter of 2005.

How is the overall political situation in Australia? The country is much closer to some political trouble spots like Indonesia than the U.S.

The political situation in Australia is extremely stable. The conservative government was re-elected last year, so there are not likely to be any major political surprises. With recent events like the tsunami disaster, Australia is providing aid and support to Indonesia, which assists in developing a positive relationship.

Australia is also far closer to China than the U.S. How is Australia handling China's emergence?

Australia has benefited from increased trade with China and the rest of Asia over a number of years, but this has obviously increased significantly over the last few years. Australian resource companies are benefiting from increased sales of commodities to China. Throughout this period Australia has maintained a strong relationship with the United States that goes beyond economic trade and which has strengthened in recent times.