Key insights from the week that was.
This week provided a big surprise for consumer sentiment in Australia. Meanwhile, FOMC Chair Powell made it crystal clear that the US central bank will cut rates at its next meeting in July.
The pre-eminent release of the week was our Westpac–MI consumer sentiment survey for July. Coming on the back of two rate cuts, the passing of the Federal Government’s three-stage tax cut plan, a stabilisation in house prices in Sydney and Melbourne, and broad-based gains for equities, there was every reason to believe that consumer sentiment would firm in the month.
However, what we instead saw was a concerning 4.1% fall in the headline index to 96.5 – an outright pessimistic level. While views on family finances versus a year ago did improve in the month, expectations for the year ahead fell away, to be circa 9% below average. Economic expectations for 1 and 5 years ahead also dropped back to near their long-run average, having consistently printed above that level since late-2017. Of concern for consumers looking forward is the labour market, with unemployment expectations now clearly above average for the first time since mid-2017 (note a higher reading for this series points to a higher expectation of unemployment, i.e. a weaker labour market).
The one area of the survey that was ‘as expected’ was the housing detail. On the back of the rate cuts and APRA’s lending standards adjustment, ‘time to buy a dwelling’ recorded its first above-average reading in four and a half years. House price expectations also strengthened further in the month. Responses from each of the states point to positive price growth, though the overall index is still below average – implying future gains are likely to be modest.
Turning to the business sector, the NAB business survey for June was another sombre read, with confidence retracing its post-election bounce to be back below average, while conditions remained sub-par. On the latter, for Q2 overall, conditions are the weakest they have been since 2014.
In contrast to households expectations of the labour market however, at June employers remained happy to hire, the NAB business survey’s employment index printing above average at a level consistent with job gains of 20k per month – high enough to keep the unemployment rate broadly unchanged. That said, if forward orders remain weak in the period ahead and profitability continues to be squeezed, it is difficult to see this positive view on employment enduring. Westpac continues to expect the unemployment rate to rise towards 5.5% over the coming 6-12 months. Along with persistently weak consumer demand, this is why we see the RBA cutting the cash rate once more in November to 0.75%. To this view, risks are to the downside.
Moving offshore, in the US this week we received a comprehensive update on the views of the FOMC as Chair Powell appeared before Congress and the June meeting minutes were released. In short, it was very clear from these communications that, not only will a cut be delivered at the July meeting, but that another will follow before year end. These cuts are best considered insurance and are justified by the expectation that current global uncertainties will persist for the foreseeable future – principally affecting business investment in the US.
To our and the FOMC’s expectation of two cuts by year end, the risk is that current uncertainties grow and/or their economic impact in the US spreads to the consumer via employment and wages. If that were to occur, then the FOMC would likely see a need to continue cutting into 2020, in line with the market’s four-cut expectation. The risk of such an outcome is less than 50%, but not immaterial. With regards to inflation, the latest CPI print surprised to the high side. The 0.3% core inflation result for June was driven by a rebound in apparel and used vehicle prices, supporting the FOMC’s view that recent weakness will prove transitory. The all-important shelter component also continued to rise at a robust pace. With annual core inflation at 2.1%yr and headline at 1.6%yr, there is no reason to fear inflation to the upside, but equally no real justification to believe disinflation will prove a lasting concern either.