Consumers still confident, RBA optimistic: CommSec's Savanth Sebastian

Consumers still confident, RBA optimistic: CommSec's Savanth Sebastian
Consumers still confident, RBA optimistic: CommSec's Savanth Sebastian
Consumer sentiment predictably eased last week from 10-month highs. No doubt the terrorist attacks in Paris added a modest dampener to the latest result.
Overall confidence remains healthy consumers are still more upbeat than a year ago and sentiment is above the short-term average.

Interestingly the outlook for family finances over the next year lifted in the past week and is holding just shy of the 20-month highs reached in mid-October.
The upbeat employment data last week would have encouraged households when it comes to job security. Also, the Reserve Bank believes that the question on the outlook for family finances is most instructive and the latest result is still well above average levels.

The Reserve Bank Board minutes make for interesting reading. Although there was no significant surprise in views. Board Members were slightly more upbeat on the prospects for the Australian economy and continued to reiterate firmer growth over the next two years. No doubt the weaker Australian dollar is supporting a rebalancing and helping to offset the weakness in mining investment. Interestingly the more upbeat view came ahead of the stronger employment numbers last week.
Consumers still confident, RBA optimistic: CommSec's Savanth Sebastian

If the anticipated lift in activity does not take place, then this could prompt the Board to assess the need for more stimulus. And clearly the low inflation result has left the door open for a further rate cut.

What do the figures show?

Consumer sentiment

The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.7 points (0.6%) to 115.9 in the week to November 15 Confidence is up 2.6% over the year and above the average of 111.4 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 +11 to +10;
The estimate of family finances over the next year was up from +25 to +29;
Economic conditions over the next 12 months was down from +5 to +1;
Economic conditions over the next 5 years was down from +14 to +12;
The measure of whether it was a good time to buy a major household item was unchanged at +28 points.
The key quotes from the Board minutes:
Stronger growth expected: “Members noted that the forecasts for GDP growth were not materially different from those presented three months earlier. Growth was expected to be between 2–3% over the year to June 2016, before rising to 23⁄4–33⁄4 % over the year to June 2017.”
Job market: “Employment growth had been stronger than expected over 2015 and this had been accompanied by a noticeable increase in the participation rate. Employment growth had been concentrated in the household and business services sectors. Measures of job vacancies and advertisements pointed to continued growth in employment in the months ahead.”
Bank lending: “The major banks in Australia continued to raise equity to meet the changes to minimum capital requirements announced by APRA around mid-year, which would take effect from July 2016. Equity as a source of funding for banks had increased by around 1⁄2 percentage point to 8 per cent of total funding. The largest banks had increased standard variable housing rates in October by 15–20 basis points. Members noted that widening margins on mortgage lending were in part offsetting lower margins on lending to larger businesses, for which lending rates had continued to decline in the face of strong competition. Deposit rates had been lowered and funding costs more generally had declined.”
Inflation: “However, members recognised that there was still evidence of spare capacity, including the relatively high unemployment rate, low wage growth and the lower-than-expected inflation outcome in the September quarter. The gradual nature of the pick-up in domestic growth suggested that spare capacity would persist for some time. Inflation was forecast to be consistent with the target over the next one to two years, but somewhat lower than earlier expected.”
Outlook: “Taking the above information into consideration, members decided that leaving the cash rate unchanged at this meeting was appropriate. They judged that the inflation outlook may afford some scope for further easing of monetary policy, should that be appropriate to lend support to demand. The Board would continue to assess the outlook, and whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with the target”
What is the importance of the economic data?
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.
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
CommSec expects no change to interest rate settings in coming months. 
Savanth Sebastian is an economist for CommSec
Finance Household Spending

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