Australian & New Zealand Weekly

Week beginning 16 February

• Australian consumer fear at record levels.
• RBA: Stevens testimony, Edey speech, Feb meeting minutes.
• Westpac-MI Leading update on the growth outlook.
• Australian data: Q4 retail sales, vehicle sales, imports.
• New Zealand data: producer prices.
• US data: housing starts & permits, CPI & PPI, industrial prod'n.
• Fed: Bernanke speech, Jan FOMC minutes, Fedspeak.
• Key economic & financial forecasts.

Australia: Consumer fear at record levels

Last week we received data which greatly added to our understanding of the current dynamics of the Australian household sector.

Since the last Westpac-MI Consumer Sentiment Survey in January there was a 100 basis point cut in the RBA's cash rate; the cut being passed on in full by all the banks to the prime variable mortgage rate and the announcement of the $42bn stimulus package (which included $12.7bn in direct payments to Australian taxpayers in the June quarter). Despite all this good news the Westpac-MI Consumer Sentiment Index fell by 4.6%. Further the Index is now down by 7% since September. That is despite the RBA slashing the overnight cash rate by 375 basis points since September and the Australian banks passing on cuts of 350 basis points to the prime variable mortgage rate over that period.

The explanation for that rather perverse result is that consumers are certainly recognising the importance of these welcome policy initiatives for their current position but are very sceptical about the future. Within the Consumer Sentiment Index we have two types of questions - those on a household's assessment of their current position and those measuring their expectations. We have set up two separate Indexes - the Current Conditions Index and the Expectations Index. Usually both Indexes move in the same direction - good or bad economic news usually affects current assessments in the same direction as future assessments.

However, there are times when the Indexes move in opposite directions. Of most importance is when present conditions are assessed to have improved while expectations in fact deteriorate. In the three months to February the Current Conditions Index rose by 24.7% while the Expectations Index actually fell by 13.3%. We have constructed a "Fear Index" which measures the difference between the quarterly growth rate in the Present Conditions Index and the growth rate in the Expectations Index. Clearly when the Present Conditions Index rises and the Expectations Index falls there will be a positive read on the Fear Index.

Figure 1, which sets out the Fear Index, shows that the last observation for February 2009 is by far the largest read in the Index since the Survey was first compiled in 1974. This reading of the Fear Index is significantly higher than reads which preceded the two previous recessions (1982/83) and (1990/91). The Job Security Index which is also measured in the Consumer Sentiment Survey also registered its highest ever read - see Figure 2.

With households in such a fearful mood, significantly driven by their job concerns, there is little doubt that they will be aiming to restore their balance sheets and increase savings. This was very clear in December, when households received $8.4bn in government payments but retail sales increased by "only" $ 700m. Further we have seen a sharp reversal in equity withdrawal as households move quickly to pay down debt. With this Fear Index at record levels it seems likely that further payments to the sector including tax cuts will be largely saved. That however is not wasted policy since it will assist households to lower debt putting them in a stronger position to deal with future developments. All else equal the downturn associated with a further possible negative shock will be moderated.

The latest read of the Consumer Sentiment Index also contained some welcome news. There was a 7% increase in the Index measuring whether now is a good time to buy a house. That Index is now at its highest level since December 2001 indicating that some recovery can be expected in the housing market. That signal was confirmed when finance approvals surged by 6.4% in December, including a 10% increase in lending for new home construction. Our statistical work based on the rise in the Sentiment Index is pointing to a solid increase in new borrowing. However growth in the stock of housing credit, which is dominated by existing borrowers, will stagnate as these borrowers seek to reduce debt.

Australia: Data Wrap

Jan ANZ job ads

• Total job ads fell 6.3% in January after a 10.0% plunge in December, to be 33.7% down on a year ago. However, the detail was mixed, with newspaper ads rebounding 12.3% in the month but internet ads falling by 7.3%.
• Job ads are often volatile over the new year period because of seasonal adjustment difficulties. The bounce in newspaper ads may reflect this. However, if the rebound is sustained it could represent tentative evidence of the Government's December fiscal stimulus package providing some support to the labour market in early 2009 (and supporting our view of some relative resilience in employment data in early 2009 with the greater deterioration to come in 2009Q2 and Q3).

Feb Westpac-MI Consumer Sentiment

• The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.6% in February from 89.9 in January to 85.8 in February. This is a truly unique result. The fall comes in the wake of the RBA's 100bp rate cut and the Government announcing a $42bn fiscal stimulus package. Negatives are deteriorating labour market prospects and a 13.3% rebound in petrol prices
• An unprecedented wedge has emerged between the Current Conditions Index (up 3.9% in Feb and up 24.7% since Nov) and the Expectations Index (down 10.5% in the month, to be down 13.3% since Nov). While consumers recognise the improvements from aggressive policy stimuluses the outlook looks bleak.

Dec housing finance

• Housing finance approval numbers to owner-occupiers rose by 6.4% in December. New lending (ie ex-refinancing) is now up 10% over the last four months, partially reversing the 27% slump over the seven months to August. This marks the start of the recovery in response to the RBA's policy u-turn and the boost to the First Home Owners scheme.
• Driving the recovery to date are first home buyers. We estimates loans to the segment are up 41% in two months. Approvals for the construction of new dwellings showed their first rise of any note in over a year, jumping 9.9%. The value of investor finance showed a partial recovery in December, rising 2.9% after a 6.8% drop. Reports of 'credit rationing' to potential developers persist.

Jan labour force

• Employment stalled over the last two months, rising by just 1.2k in January after a flat December. Annual jobs growth slowed to 0.9%, well off the 2.8% pace of a year-ago.
• Unemployment jumped to 4.8% from 4.5% in December. We view the increase as catching up with recent soft job numbers.
• Full-time employment remains volatile from month to month, up 33.7k in January after a 48k fall in December. Annual growth has slowed to 0.9%.
• In WA 22k jobs were lost in the month. The labour market has softened considerably in the resource rich states since August, coinciding with the sharp slump in world growth.

Feb Westpac-MI unemployment expectations

• Consumers' unemployment expectations continued to deteriorate in February, with the index rising 1.3% after a 5.0% rise last month. This took their trend deviation from their full history average higher still to 42.8% from 40.3%, higher than seen in the 90/91 recession (high for the deviation then was 31.9%) or 82/83 recession (deviation high was 36.1%), implying recessionary levels of consumer labour market pessimism that can only reinforce the consumer impetus to increase savings courtesy of boosts to disposable income from aggressive rate cuts and fiscal handouts.

Feb MI consumer inflation expectations

• Consumers' inflationary expectations continued their rapid downtrend in February, with the median expectation falling to 2.3% from 2.7% previously, the lowest since Dec-98.

Jan NAB business survey

• Business confidence weakened, falling to a fresh record low, after a temporary improvement in December. We expect the loss of confidence to contribute to business investment downgrades.
• The business conditions index partially reversed December gains. The conditions index at -11 is consistent with our view on domestic demand. We expect the index to weaken further in coming months.

Round-up of local data released last week

New Zealand: The Week ahead & Economic Wrap

Cautious consumers

New Zealand consumers have become cautious. Carefree spending seems to be a thing of the past. The official retail sales data for the last quarter of 2008 confirms what we already suspected - consumers have put away their purses and wallets. Christmas was not a good one for retailers.

Retail sales in Q4 provide more evidence that consumers have been saving their extra cash from tax cuts, lower interest rates and lower fuel prices. The value of sales in Q4 2008 was 1.5% below year ago levels, with the volume of sales down 3.7% over the same period. For many, the hit to household balance sheets over the past year via lower house prices and lower share prices has been a key reason behind a general reluctance to spend. Falling house prices has brought a major swing towards households injecting equity (on average) into houses in 2008, compared to the hefty withdraws over the preceding five years.

Durable items - especially cars - continue to be most affected by the consumer retrenchment. Car sale volumes declined 4.9% in Q4 (seasonally adjusted) to be down 17.4% on a year ago. Furniture and floorcoverings and hardware sales were also down. Appliances volumes bucked the trend of falling durable sales rising 4.6% in the quarter thanks to aggressive discounting. Appliance prices fell 1.9% in Q4 to be 6.7% lower than a year ago.

In the month of December, petrol prices fell around 9%. This was reflected in an 8.4% decline in the value of sales at petrol stations during the month. Importantly though, it appears households did not spend the fuel savings elsewhere. Core sales (that is total sales minus auto related sectors) fell 0.6% during December.

The release of the REINZ housing market data for January suggests the squeeze on household balance sheets has continued into 2009. The REINZ reported the house prices fell to $325,000 in January down 4.4% from a year ago. The housing market remains weak, not only indicated by easing prices but also reduced activity. The number of sales in January was 28.5% down on a year ago. This is a 20 year low in house sales (for January), although after adjusting for holiday effects we suggest this result is not as weak as house sales were in November last year. The substantial interest rate cuts are helping at the margin. Likewise, even though 59 days is the median number of days it takes to sell a house in New Zealand at present, after adjusting for holiday effects this is not as long as it took through the middle of 2008. We read the overall housing data as one where housing activity is finding a bottom - at a low level. Meanwhile, house prices continue to drift and are expected to continue to do so through 2009. This will encourage households to spend less of their income flow to protect their balance sheets.

Early indicators suggest this to be case with electronic transactions data indicating retail sales eased again in January. The value of electronic transactions at retail outlets fell 0.6% in January - the third consecutive monthly decline. Core sales, those excluding the auto related sectors, fared slightly better falling by only 0.2% in the month.

All up, the data over the past week show us the New Zealand consumer is cautious and is likely to remain so for a while. Rising unemployment, less job security and concerns on how the world economic recession will hit home will add to a cautious tone - an atmosphere likely to remain through 2009.

Policy makers are responding. The government continues to announce stimulus measures including bringing forward infrastructure spending and re-jigging business tax payments in addition to previously scheduled tax cuts coming in April. Further interest rate cuts are also required to lift consumer and business confidence and help offset the negatives. We currently anticipate the OCR to fall another 100bps to 2.5% by the end of April. As ever, focus remains firmly on world economic developments for guidance on how quickly rates come down and ultimately how low they go. This is especially so this week with the domestic data calendar looking very slim. Producer prices for Q4 2008 are the only data of note. Our expectation is that both input and output prices rose 0.4% over the quarter - a substantial easing in producer price inflation from earlier in 2008 and certainly nothing to stand in the way of further interest rate cuts.

Round-up of local data released last week

Data Previews

Aus Q4 real retail sales

Feb 18, Last: 0.1%, WBC f/c: 1.0%

Mkt f/c: 1.0%, Range: 0.4% to 1.7%

• Real retail sales were basically flat in 2008Q3, edging up just 0.1% after slipping 0.2% in Q2 and 0.1% in Q1. Through the year growth fell to just 1%yr from 5.8%yr in 2007Q3.
• Q4 will show a sharp jump in sales volumes. Monthly retail sales posted solid gains in Oct (+1%mth) and Nov (+0.4%mth) with a sharp 3.8%mth spike in Dec as the Govt's $8bn in fiscal payments went out. Overall, nominal sales were up 1.6%qtr, double the 0.8%qtr rise in Q3. CPI data suggests retail prices rose 0.6%qtr giving a 1% rise in volumes. Survey problems due to a redesign in July that was subsequently reversed in Nov will continue to affect the data and may see revisions to Q3.
• Sharply lower interest rates and fiscal payments gave a big boost to disposable incomes in Q4 but so far the flow-through to spending has been more muted than expected, implying a sharp surge in household savings.

Aus Dec Westpac-MI Leading Index

Feb 18, Last: -2.2% annualised

• The annualised growth rate of the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was -2.2% in November, well below its long term trend of 3.5% and a clear signal of recession. Past recessions in Australia have all been preceded by negative growth in the leading index.
• Monthly components continued to weaken in December: dwelling approvals fell a further 2.9% after slumping 10.2% in November; the money supply contracted 0.3% after rising 1.2% in the previous month; the sharemarket continued to move lower, albeit at a much slower pace, the ASX200 down 0.5% in December after falling 6.9% in November; and US industrial production contracted another 2% after falling 1.3% in the previous month.

US Feb regional Fed factory surveys

Feb 17, NY Fed index Last: -22.2, WBC f/c: -25.0

Feb 19, Philly Fed index Last: -24.3, WBC f/c: -30.0

• These neighbouring regional Fed surveys both staged modest improvement at the start of 2009 (as did the Richmond and Dallas Fed factory surveys). Similarly the national ISM factory survey rose a few points. But we must stress that the level of these surveys remained very weak in January.
• Realistically, forecasting these surveys of 100 or so regional factory bosses is an impossible task without agents on the ground. But given our view that Q1 GDP growth is likely to be weaker than Q4's inventory boosted 3.8% annualised decline, we would be surprised to see these surveys build upon their new year gains.
• We are not forecasting new record lows for either the NY or Philly Fed, but do expect renewed slippage in February. The jobs sub-components should be especially weak.

US Jan housing starts & permits to keep sliding

Feb 18, starts Last: -15.5%, WBC f/c: -8.0%

Feb 18, permits Last: -11.1%, WBC f/c: -8.0%

• It is not hyperbole to say that housing starts and permits fell off a cliff in Q4 last year. Starts posted back to back 15% plunges in both Nov and Dec, while permits fell almost as steeply. There were no obvious distortions from the sometimes volatile multiples component, or the weather.
• What incentive is there to buy or build a new home in the US, when there are 6 million empty homes for sale?
• With homebuilder sentiment slumping to a new record low (from 72 in 2005 to 8 in Jan), new home sales also down 15% in Dec and construction hours down nearly 2%/jobs down 111k in Jan we expect further starts/permits weakness. Poor weather in some areas could add to the underlying depressed story.

US Jan industrial production to drop again

Feb 18, Last: -2.0%, WBC f/c: -1.8%

• Industrial production posted steep declines in the closing months of 2008, as the global trade collapse decimated exports and slumping domestic demand compounded factory sector weakness.
• Indications ahead of the Jan report point to another weak result. Factory hours worked fell 2.1% last month, with autos hard hit again (hours down 8.5%!) and manufacturing jobs fell by over 200k. The factory ISM picked up a few points but remained at a very weak level, consistent with a further steep decline in output.
• Given these factors we expect a 1.8% IP fall, with some minor upside risk from a rise in mining output given that hours worked in that sector rose 0.8%.

US Jan inflation indicators

Feb 19, PPI headline Last: -1.9%, WBC f/c: flat

Feb 20, CPI headline Last: -0.7%, WBC f/c: 0.2%

• Tumbling energy prices were the main driver of sharply lower inflation across a range of measures in the closing months of 2008. The headline PPI peaked at 9.9% yr in July 2008 but turned negative in Dec at -0.9% yr; similarly the CPI fell from its July peak of 5.6% yr to just 0.1% yr at the end of last year.
• Energy prices were volatile in Jan but did not fall further, indeed retail gasoline prices edged up. Food prices continued to fall, however. Slumping auto sales might normally lead to discounts, but with new vehicles already priced at loss making levels, this sector remains a source of volatility, especially in the PPI.
• Jan should see the run of monthly PPI and CPI declines come to an end, but the annual rates will continue to fall and core rates should remain very subdued, given the slumping economy.

Westpac Institutional Bank
http://www.westpac.com.au

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