Confidence slump; Benign Chinese inflation

Consumer confidence; NAB Business Confidence; Chinese Inflation

• Business conditions and confidence: The NAB business conditions index held steady at +2.1 points in February. The business confidence index fell from +3.3 points to -0.2 points – a 19 month low and below the long-term average of +5.8 points. The survey was conducted from February 23 to February 27.
• Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating fell by 2 per cent in the week to February 8 to a reading of 110.3, mildly below the 2014 average of 111.3.
• Tame Chinese inflation: Producer prices fell by 4.8 per cent in the year to February (median forecast: 4.3 per cent decline). Consumer prices rose by 1.4 per cent over the year (median forecast: +1.0 per cent).
• According to the Australian Institute of Petroleum, the national average Australian price of petrol rose by 5.7 cents per litre to a 3-month high 129.8 cents per litre in the week to March 8.

What does it all mean?

• Consumer and business confidence continues to slide despite a rather healthy fundamental outlook. Consumer sentiment is now holding at 3-month lows while business confidence levels have fallen to 19-month lows. It is pretty clear that the rate cut in February didn’t have the desired impact. In fact the lack of an improvement in the weekly consumer confidence figures following the interest rate cut may have been another reason that the Reserve Bank kept rates on hold in March. As Reserve Bank policymakers have admitted in recent times rate cuts just don’t seem to have the same impact as in the past.
• From a broader sense, confidence levels are ok without being great. It seems the uncertain political environment and falling Aussie dollar was the key dampeners on household confidence. In addition the release of the Intergenerational Report by Federal Treasury also had a detrimental impact on confidence. The discussion of ongoing budget deficits and need for older Australians to work longer has clearly sapped spirits.
• In addition, the ongoing lift in fuel prices across capital cities seems to have had a dampening effect on confidence levels. The national average price lifted by almost 6 cents in the past week and is now holding at a 3-month high. Not only is the slide in the Aussie dollar making fuel more expensive but it is also increases the cost for household. For Aussie consumers, a stronger Aussie dollar means increased purchases on the internet and trips abroad, so the sharp drop in the Aussie dollar continues to dent people’s confidence.
• Chinese inflation remains benign, leaving the door open for the authorities to stimulate the economy further in coming months if the need permits.
• The Reserve Bank will continue to discuss the merits of a further rate cut. CommSec expects interest rates to be cut again in May. An improvement in confidence levels will be required to support broader activity levels.

What do the figures show?

National Australia Bank Business Survey:

• The NAB business conditions index held steady at +2.1 points in February. The business confidence index fell from +3.3 points to -0.2 points, below the long-term average of +5.8 points.
• The index of trading conditions held steady at +5; employment improved from -1 to 0; profitability held steady at +2 points; forward orders rose from +1 points to +2 points.
• Inflationary pressures were mixed in February. The monthly reading of labour costs rose at a 0.6 per cent quarterly rate in February after a 0.8 per cent rise in January. Purchase costs rose at a 0.9 per cent quarterly rate in February, after a 0.8 per cent rise in January. Final product prices were up 0.2 per cent in February. And retail prices were up 0.1 per cent in February after a flat result in January.
• Capacity utilisation rose from 79.9 to 80.4 per cent in February, and was still below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit fell from 74 per cent in January to 60 per cent in February.

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating fell by 2 per cent in the week to March 8 to 110.3, mildly below the 2014 average of 111.3.
• Four of the five components of the index fell in the latest week:
• The estimate of family finances compared with a year ago was unchanged at +4;
• The estimate of family finances over the next year was down from +24 to +22;
• Economic conditions over the next 12 months was down from -5 to -7;
• Economic conditions over the next 5 years was down from +6 to 0;
• The measure on whether it was a good time to buy a major household item was down from +33 to +32.

Petrol prices

• According to the Australian Institute of Petroleum, the national average Australian price of petrol rose by 5.7 cents per litre to a 3-month high 129.8 cents per litre in the week to March 8. The metropolitan petrol price rose by 5.7 cents to 129.9 cents per litre and the regional price rose by 5.8 cents to 129.6 cents per litre.
• The national average Australian price of diesel petrol rose by 0.5 cent to 128.5 c/l in the week to March 8. Last week the metropolitan price rose by 0.2 cents to 126.5 c/l, while the regional average price rose by 0.6 cents to 130.1 c/l.
• Average unleaded petrol prices across states and territories over the past week were: Sydney (up by 6.3 cents to 132.1 c/l), Melbourne (up by 6.7 cents to 128.3 c/l), Brisbane (up by 7.3 cents to 134.9 c/l), Adelaide (up by 0.2 cents to 119.3 c/l), Perth (up by 2.4 cents to 127.9 c/l), Darwin (up by 2.0 cents to 132.4 c/l), Canberra (up by 11.5 cents to 129.7 c/l) and Hobart (up by 6.7 c/l to 132.2 c/l).

Chinese Inflation

• The annual rate of consumer price inflation rose from 0.8 per cent in January to 1.4 per cent in February. The result was mildly above forecasts. Over the month consumer prices rose by 0.3 per cent.
• Food prices rose by 2.9 per cent in February (pork 0.8 per cent) to be up 2.4 per cent compared with a year ago (pork -1.5 per cent). Non-food prices rose 0.3 per cent in February and was up 0.9 per cent on a year ago.
• Producer prices (business inflation) fell by 4.8 per cent in February compared with a year ago. Economists had tipped a 4.3 per cent annual decline.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• 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 recovery is still in its infancy and the Reserve Bank has some work on its hands to disentangle the various parts of the economy. However the patchiness in the domestic economy and sluggishness in global growth should result in policymakers continuing to debate the merits of another rate cut. CommSec expects a further interest rate cut in May.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• 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?

• The recovery is still in its infancy and the Reserve Bank has some work on its hands to disentangle the various parts of the economy. However the patchiness in the domestic economy and sluggishness in global growth should result in policymakers continuing to debate the merits of another rate cut. CommSec expects a further interest rate cut in May.