Consumer spending intentions hit 15-month high

Reserve Bank focused on “full employment”
Weekly consumer confidence; RBA Board Minutes; Covid-19 Household survey

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.8 per cent to 112.5 (long-run average since 1990 is 112.6). Last week the measure of whether it was a ‘good time to buy a major household item’ jumped by 6.2 per cent to a 15-month high of 22.5 points.

Reserve Bank Board meeting minutes: At the May 4 Board meeting Reserve Bank policymakers said, “Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia. Members agreed that a return to full employment is a high priority for monetary policy and would assist with achieving the inflation target.”

Covid-19 household survey: The Australian Bureau of Statistics (ABS) released its April survey of Aussie households. The ABS said, “one in four Australians (25 per cent) expected their household income to increase over the next 12 months, while one in ten Australians (10 per cent) expected a decrease.”

The consumer confidence figures have implications for retailers and other consumer-focussed businesses. The Reserve Bank Board minutes are important in gauging policy settings. ABS surveys provide insights into how COVID-19 is affecting the economy.

What does it all mean?

• Consumer sentiment, as measured by ANZ and Roy Morgan, has been volatile in recent weeks. The sentiment gauge tumbled 1 per cent in early May on concerns about a virus flare up in Sydney. But consumers were more chipper last week with the index up 0.8 per cent following the release of the Federal Budget. ANZ economists also reported that confidence in Sydney lifted 5.4 per cent as no new community cases of Covid-19 were reported with government restrictions easing.

• Typically, consumer confidence and retail spending intentions lift as mobility increases. And a few Budget ‘sweeteners’ also likely boosted optimism. In fact, the ANZ-Roy Morgan measure of whether it was a ‘good time to buy a major household item’ jumped 6.2 per cent to a 15-month high of 22.5 points in the past week.

• The Reserve Bank has provided extensive commentary – including updates to its economic forecasts and policy forward guidance – since the beginning of May, so today’s May 4 Board meeting Minutes contained little new information for investors. The Board wants to see a regime of “full employment” – higher wages and core inflation safely sitting in its 2-3 per cent target range – before it tightens monetary policy. Policymakers continue to stress that these preconditions for a higher cash rate won’t be met until “2024 at the earliest.” But added, “future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia.”

• So what could happen next? With the economic expansion and job market recovery on a firmer footing a tentative timetable for policy normalisation or a ‘tapering’ of bond purchases could be forthcoming at the July 6 Board meeting. In fact, the Minutes noted, “members agreed that, at the July 2021 meeting, the Board would consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. Members agreed that a change to the target of 10 basis points was not warranted. Also at the July meeting, the Board would consider future bond purchases following the completion in September of the second $100 billion of purchases under the government bond purchase program.”

What do you need to know?

Consumer sentiment – Week ended May 16

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.8 per cent to 112.5 (long-run average since 1990 is 112.6). Three out of the five major components of the index rose last week:

Minutes of the Reserve Bank Board meeting held on May 4, 2021

• Last paragraph: “The Board remained committed to doing what it reasonably could to support the Australian economy, and would maintain highly supportive monetary conditions until its goals for employment and inflation were achieved. Members affirmed that the cash rate target would be maintained at 10 basis points, and the rate of remuneration on Exchange Settlement balances at zero, for as long as necessary. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a return to a tight labour market. The Board viewed these conditions as unlikely until 2024 at the earliest.”

• On inflation: “Despite the strong recovery in economic activity, the recent Consumer Price Index (CPI) confirmed that inflation pressures remain subdued in most parts of the Australian economy…The increase in commodity and other input prices was expected to contribute to higher inflation globally in subsequent months, and members noted that inflation expectations in advanced economies had also increased to be closer to central banks’ targets.”

• On the labour market and JobKeeper expiry: “Employment growth was expected to remain firm in the months ahead, given the solid momentum in activity and buoyant forward indicators of labour demand. Some surveyed firms were reporting a lack of available labour as a constraint on output. While job losses from the end of the JobKeeper program were likely, these were expected to be more than offset by demand for labour elsewhere in the economy.”

• Housing market: “given the environment of strong demand for housing, rising housing prices and low interest rates, members agreed on the importance of maintaining lending standards and carefully monitoring trends in borrowing.”

• Bond yield target and bond purchases: “…members agreed that, at the July 2021 meeting, the Board would consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. Members agreed that a change to the target of 10 basis points was not warranted…The Board would consider future bond purchases following the completion in September of the second $100 billion of purchases under the government bond purchase program…The board remained willing to undertake further bond purchases if doing so would assist with progress towards the bank’s goals of full employment and inflation…yields on other 3-year financial instruments…were consistent with market participants expecting the cash rate to begin increasing from its current level during 2023.”

• Interest rate outlook: “Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia. Members agreed that a return to full employment is a high priority for monetary policy and would assist with achieving the inflation target. Consequently, monetary policy would be likely to need to remain highly accommodative for some time yet.”

Household Impacts of Covid-19 Survey – April

• The April Covid-19 household survey was released by the ABS.

• According to the ABS: “One in three (32 per cent) accessed government, health or other services online in the previous four weeks.

• 68 per cent of Australians agreed or strongly agreed that they would get a COVID-19 vaccine when it becomes available and is recommended for them, a decrease from February 2021 (73 per cent).

• One in four (25 per cent) Australians expected their household income to increase over the next 12 months, while one in 10 (10 per cent) Australians expected a decrease.

• Almost two in five (38 per cent) Australians earning $3,000 or more weekly expected an increase in income, compared with one in nine (11 per cent) earning between $400 to $649 per week.

• Over the next 12 months, over one in five (22 per cent) Australians plan to use their current or expected savings on travel, one in seven (15 per cent) plan to renovate their home and one in 10 (10 per cent) plan to build or buy a home.

• Australians who had a job working paid hours was the same in April 2021 (63 per cent) and March 2021 (63 per cent).”

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.

• The Australian Bureau of Statistics (ABS) is providing updates on the coronavirus impact on households and businesses to provide timely information for decision makers.

What are the implications for investors?

• Encouragingly, consumers appear willing to spend following the JobKeeper expiry in late March. The CBA Household Spending Intentions report – released today using CBA and Google trends data – showed spending intentions climbing across all seven major categories, such as home buying, retail and entertainment.

• The preliminary reading on retail trade is scheduled for Friday. CBA Group economists expect spending to lift by 0.8 per cent in April, with the annual growth rate up sharply due to base effects from last year’s national virus lockdown.

• While the ANZ Roy Morgan consumer inflation expectations measure eased from 3.9 per cent to 3.6 per cent last week, higher consumer prices could crimp consumer demand and confidence, weighing on retail spending and company profitability. In its meeting Minutes released today, Reserve Bank policymakers noted, “that inflation expectations in advanced economies had also increased to be closer to central banks’ targets.”

• For investors there is plenty to digest in the coming days with the world’s largest retailer Walmart set to release quarterly earnings results on Tuesday. Other ‘big box’ retailers set to issue figures, include Target, Home Depot, Lowe’s, Ralph Lauren and L Brands. Commentary on whether shopper traffic is being impacted by higher US consumer prices, how they are handling higher costs and whether they are lifting employee wages could influence share price movements.

• The Reserve Bank is unlikely to pull the interest rate lever any time soon. But policy settings could be adjusted in early July. CBA Group economists expect the April 2024 bond to continue to be targeted and a third round of bond purchases of $A50 billion to be announced. Already, the Bank of England and Bank of Canada have both ‘tapered’ or slowed their bond buying programs in recent weeks, but both stressed that this should not be interpreted as a change in monetary policy stance.

Published by Ryan Felsman, Senior Economist, CommSec