Key insights from the week that was.
The Federal election campaign officially kicked off in Australia this week shortly after the Westpac-MI consumer sentiment indicated the Budget was well received. Overseas, central banks reiterated a cautious tone while the Brexit deadline was extended (again).
Wednesday’s Westpac-MI Consumer Sentiment survey was eagerly anticipated after last week’s release of the 2019/20 Federal Budget included a further $19.5bn in income tax relief.
While the month to month rise in Sentiment was fairly muted at 100.7 compared to 98.8 in March, sentiment clearly caught an uplift from the Budget. Indeed, among those surveyed post-budget, sentiment was 7.7% higher than those surveyed pre-budget – the most positive turnaround since we began tracking pre and post budget responses in 2011.
Yet it is important to take a step back from the near-term lift in overall sentiment. Persistent weak wages growth, falling house prices, and the perceived rising cost of living are all still weighing on consumers. This is reflected in the survey component ‘family finances compared to a year ago’ – which declined 4.9% in April (showing little movement between pre and post Budget responses) and is down 9.6% on a year ago.
In that respect, disappointing consumption growth was a key theme in RBA Deputy Governor Debelle’s speech on “The State of the Economy”. Ultimately, “unexpectedly weak” consumption had been the main surprise in recent growth outturns with “other parts of GDP” evolving “broadly as expected”.
Here, Debelle related some part of the slowdown to declines in housing prices but was sceptical of a direct ‘wealth’ effect. Instead, he believes lower housing turnover is the main factor as consumers spend less on household furnishings as well as vehicles. With more supply coming on to the Melbourne and Sydney housing markets this year, Debelle sees further weight on prices. While some comfort can be found in the stable read in Feb housing finance on Tuesday, today’s release of the biannual Financial Stability Review is still likely to emphasise that the RBA is cautious and watching housing.
However, of greater concern to Debelle in regards to the consumption outlook is low household income growth and the consumer’s “increasing expectation that it is likely to remain low”. The RBA remain of the view that household income is likely to pick-up over the next few years but this is conditioned on strength in the labour market persisting. Indeed, the key take-out from Debelle’s speech is that the RBA are still assessing “conflicting signals provided by the labour market, the GDP data and the business surveys”. Westpac believes that the ‘tension’ in the data will become clearer in due course, with our expectation that the RBA will deliver rate cuts in August and November this year – see today’s bulletin on “The AUD, the RBA, the FOMC & commodities” from our Chief Economist Bill Evans.
Turning to offshore matters, the major thematic this week relates to central banks remaining in a cautious watch-and-wait mode, which coincides with the IMF downgrading their 2019 growth forecast to 3.3% from 3.5%.
In the US, the FOMC minutes largely reflected communication from committee members over the past month. While “some” members noted it could be appropriate to raise rates in 2019, and “several” noted their view on rates could move up or down and were not on a pre-set course, a “majority” see rates on hold this year – as per the dot plot.
Further emphasising the capacity for the FOMC to maintain their “patient” approach was the release of Mar CPI that same morning. Headline inflation overshot expectations but the core indicator underwhelmed with annual core CPI inflation declining to 2.0% from 2.1%. A lack of inflationary pressure means the FOMC can maintain a steady hand while the outcomes of various global uncertainties unfold. With that in mind, Westpac has revised its outlook for the federal funds rate to being on hold in 2019 and 2020. Our April Market Outlook was released this week and contains a comprehensive update on the Westpac view.
Across the Atlantic, the April ECB meeting confirmed the policy stance after the dovish shift in March. New information has been consistent with “slower growth momentum extending into the current year” and while “idiosyncratic domestic factors dampening growth are fading, global headwinds continue to weigh”. Accordingly, the ECB continues to believe risks are tilted to the downside.
Discussion on the pricing of new TLTRO was scarce (an announcement to be made in forthcoming meetings), but the ECB did note in April that they are analysing possible side effects of negative interest rates on the back of the recent discussion on the ECB potentially moving to a tiered deposit rate. The analysis is still in its early stages, and we do not expect a change to tiering any time soon, but if anything, the opening of the debate underscores the ECB’s awareness of rates likely being ‘low-for-longer’ in a general sense.
To the UK, the outcome of this week’s EU Summit is that the Brexit deadline has been extended to 31 October, with the option to leave sooner if the UK Parliament can agree on a path forward. This is longer than the 30 June delay UK PM May had hoped for, and will mean the UK will have to take part in European Parliament elections on 23 May, if they have not found an agreement by then.
