Rate cut fails to lift confidence, China deflation: CommSec's Savanth Sebastian

Michael CrawfordMay 9, 20160 min read


The weekly ANZ/Roy Morgan consumer confidence rating was unchanged at 113.9 in the week to May 8. Confidence is up 3 percent over the year and above the average of 112.1 since 2014.

Just one of the five components of the index rose in the latest week.

Chinese inflation: Chinese consumer prices fell by 0.2 percent in April to be up 2.3 percent on the year. (forecast 2.3 percent). Producer prices fell by 3.4 percent over the year (forecast -3.7 percent).

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Food inflation: Over the year food prices are up 7.4 percent with non-food prices up just 1.1 percent.

The consumer confidence figures have implications for finance providers, retailers, and companies dependent on consumer and business spending. Chinese economic data is especially of importance to exporters and importers.

What does it all mean?

The latest consumer confidence reading is quiet timely, providing the first perspective off how households have responded not just to the Federal budget but also the Reserve Bank interest rate cut. And in that context, if the Reserve Bank had been hoping for an immediate boost to confidence following the rate cut policymakers would be sadly disappointed – particularly in light of most of the major banks passing on the full rate cut to mortgage holders. Confidence was essentially flat in the past week.

The Federal budget would not have had a major impact on confidence. However it may be that the slide in the Aussie dollar negated the interest rate cut from the perspective of Aussie households. Over the past week the Australian dollar has fallen by over US4 cents. Overall a lower Australian dollar is great news not just for export orientated businesses but also the broader economy. However Aussie households tend to view a lower Australian dollar as a negative, making overseas travel and overseas online purchases more expensive.

The Chinese inflation data highlights the issues facing central banks across the globe. Chinese consumer prices fell in April and are up just 2.3 percent over the year. Deflation seems to be a more prevalent threat to a number of international economies. No doubt the weakness in commodity prices is feeding through to the weaker inflation results. In addition a weaker growth profile for the global economy is keeping price pressures under check.

China is Australia’s largest trading partner by a large margin. And China is attempting to rebalance activity away from construction, manufacturing and mining to service sectors like retailing, financial services, hotels and food services. And that rebalancing will continue to come with mixed results. Chinese authorities have scope to ease policy further if they deem it necessary.

What do the figures show?

Consumer confidence

The weekly ANZ/Roy Morgan consumer confidence rating was unchanged in the past week at 113.9 in the week to May 8. Confidence is up 3 percent over the year and above the average of 112.1 since 2014. Just one of the five components of the index rose in the latest week:

The estimate of family finances compared with a year ago was down from +6 to +5;

The estimate of family finances over the next year was down from +27 to +26;

Economic conditions over the next 12 months was down from -2 to -3;

Economic conditions over the next 5 years was unchanged at  +7;

The measure of whether it was a good time to buy a major household item was up  from +32 points to +34 points.

Chinese inflation:

Consumer prices fell by 0.2 percent in April to be up 2.3 per cent on the year. The annual result in line with forecasts.

Non-food prices  rose by 0.1 percent in the month to be up 1.1 per cent over the year. Prices of consumer goods rose 2.5 percent over the year (March 2.5 percent) with services up 2 percent (March 1.9 percent).

Food prices  fell by 1.4 percent in April after sliding by 1.8 percent in March. Food prices are up 7.4 percent over the year, down from the 7.6 percent annual gain in March. Pork prices rose by 3.2 percent after falling by 1.3 percent in March. Pork prices are up 33.5 percent in the year to April, up from the 28.4 percent annual increase to March.

Consumer good categories (year to April): Food, tobacco and alcohol 5.9 percent; Clothing 1.5 percent; Rent, fuel & utilities 1.4 percent; Household goods 0.5 per cent; Transport and communication -2.4 percent; Education, culture and recreation 1.2 percent ; Healthcare 3.2 percent; Other goods and services 1.7 percent.

Producer prices fell by 3.4 percent in the year to April, firmer than the 4.3 percent decline to March and ahead of the market forecasts centred on a 3.7 percent decline. It was the smallest rate of decline since January 2015.

What is the importance of the economic data?

China’s National Bureau of Statistics  releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th  of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

What are the implications for interest rates and investors?

From a household balance sheet perspective the outlook for retailers looks healthy. Lower petrol prices, firm confidence levels, solid home construction and healthy employment should all serve to boost spending levels. However the uncertainty over the timing of an early Federal election will weigh on activity over the short term.

The Reserve Bank will closely monitor developments in China and financial markets more generally.

Savanth Sebastian is an economist for CommSec

Michael Crawford

Michael is the real estate reporter for western Sydney and loves writing about homes and the people who live in them. A former production editor and news journalist, he enjoys writing about real-world property purchases as well as aspirational buys and builds. Following a recent move from Sydney’s northern beaches, Michael now actually enjoys commuting.
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