Confidence stabilises but trend index at 20mth lows


Consumer sentiment

  • The Westpac/Melbourne Institute index of consumer confidence rose modestly in February following the sharp slide in January. The index rose by 1.9 per cent to 106.6 in February.
  • In trend terms confidence levels have been falling for the past five months and are holding at the lowest levels in 20 months.

What does it all mean?

  • The improvement in the latest consumer sentiment reading is certainly a welcome sign, particularly considering the sharp slide in the prior month. The modest bounce in sentiment levels can be put down to a whole host of factors but the receding floods, and cyclone Yasi avoiding significant damage in major population centres, would have to be the key drivers.
  • The destruction wreaked by the floods and cyclone no doubt had a profound effect on all Australians. However given the backdrop of a stronger Australian dollar, rising equity markets, sliding unemployment and the Reserve Bank leaving interest rates on hold, it could be argued that sentiment levels would have jumped sharply had the natural disasters not taken place.
  • Overall it’s hard to argue that sentiment levels are upbeat or buoyant at present, especially when you look at the raw data across gender, with both male and female respondents actually noting a slide in sentiment levels. Even across the three age categories sentiment levels fell by an average of 3.5 per cent. The seasonality of the data seems to be the clear driver of the latest improvement. Even in trend terms confidence levels have been falling for the past five months and are holding at the lowest levels in 20 months.
  • Looking forward retailers will still need to discount in the near term but it is likely that the worst is behind – especially for some of the Queensland retailers. The other good news is that it is looking more likely that the Reserve Bank Board will be sitting on its hands until mid 2011. Interest rates are already modestly restrictive and there are good grounds to argue that the last move to a tighter monetary policy was a little premature. The Reserve Bank would be best served by allowing confidence and spending to repair. The strength in the labour market is also a positive and likely to drive spending in the midterm.

What do the figures show?

Consumer sentiment

  • The Westpac/Melbourne Institute index of consumer sentiment rose by 1.9 per cent in February to 106.6 after sliding by 5.7 per cent in January. The index is now down 8.9 per cent on a year ago.
  • The current conditions index fell by 1.2 per cent, while the expectations index rose by 4.1 per cent.
  • Four of the five components of the index rose in February:
    • The estimate of family finances compared with a year ago fell by 4.4 per cent;
    • The estimate of family finances over the next year rose by 1.4 per cent;
    • Economic conditions over the next 12 months was higher by 1.1 per cent;
    • The measure of economic conditions over the next five years rose by 10.2 per cent;
    • The measure on whether it was a good time to buy a major household item edged up by 0.8 per cent.

What is the importance of the economic data?

  • Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

  • The rate hikes over the past year are having a profound impact on consumer spending patterns. The housing sector is cooling while businesses continue to highlight weak trading conditions. CommSec believes that the next interest rate hike is unlikely to take place until mid 2011.
  • Looking forward, it is clear that Aussie consumers are holding on to their conservative attitudes and any further talk of rate hikes will be detrimental to modest improvements in levels. Interest rates need to remain on hold for an extended period to tempt consumer to part with their cash.
  • Retail discounting will continue to be a theme in coming months to generate consumer buying interest. However the outlook for retailers is likely to modestly improve as construction activity levels pick up. In particular the massive rebuilding phase that will take place in Queensland will boost spending across an array of sectors.
  • Our retail equity analysts have reiterated the buy recommendation on Myer. “The stock is now trading at a around a 20 per cent discount to the ASX200 industrials compared to the retail sector and at a 15 per cent discount to market and is now reasonable value on the downgraded earnings base.”

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