Consumers still jaded; Smaller rate hikes lie ahead      

Latest economic and financial data

• The minutes of the September 6 Reserve Bank Board meeting were issued. The Board discussed the case for lifting rates by either 25 or 50 basis points.
• Consumer confidence rose by 0.4 per cent in the past week, almost reversing the previous week’s decline.
• The CBA credit and debit card spending tracker shows a slowdown in spending growth.

The big picture

• The Reserve Bank Governor has stressed that household spending trends will be important in determining the size and timing of rate hikes. So timely readings on consumer confidence and spending help investors stay on top of the situation. Consumer confidence remains weak, down over 23 per cent from ‘normal’ levels.
• The Reserve Bank closely watches the weekly reading on inflation expectations. The smoothed measure sits at 5.4 per cent, which is high compared to 2019 & 2020 (3.5-4.0 per cent) but below 2011 & 2012 (5.8-6.0 per cent).
• The Reserve Bank Board is getting closer to lifting rates by 25 basis points (bp) rather than 50bp. CBA Group economists expect the cash rate to lift by a further 50bp over the next two months to peak at 2.85 per cent.  The risk is that rates lift a little higher to 3.10 per cent. The Reserve Bank Governor said last Friday that the cash rate was “still too low” and suggested a target range for the cash rate of 2.5-3.5 per cent.

The Equity Lens: What does it mean for investors?

• Consumer confidence remains historically weak but spending remains relatively strong. The question is how long this can continue – indeed the Reserve Bank Governor said on Friday it was something of a puzzle. The answer to the question is important for consumer-focussed stocks especially in the consumer discretionary sector.  Consumers are likely to continue spending provided the job market remains strong, and wages continue to grow.
• The lift in consumer views on buying a major household item is positive for retailers. Further, prospects for consumer-focussed companies will be boosted by the fact that the Reserve Bank is getting closer to its perceived cash rate ‘resting point’.

What do you need to know?

CBA weekly card spending

• “CBA’s internal credit & debit card spending data to 16 September 2022 shows that spending levels remain elevated, but spending growth appears to have slowed and may now be flat-lining. In some categories a slowdown in spending growth is evident.”
• “…the evidence suggests that total nominal spending has so far trended sideways over August and into September. With prices rising it suggests volumes growth is slowing.”
• CBA notes weaker spending growth in household goods & equipment; clothing & footwear; and recreation. But there has been a lift in spending on domestic fuel & power in recent weeks.

ANZ/Roy Morgan weekly consumer confidence

• The survey tracks views on current and future spending, current and future economic conditions, and attitudes on buying a major household item.
• “Consumer confidence rose 0.4 per cent in the past week, almost reversing the previous week’s decline.”
• Three of the five components of the survey rose over the week. Notably ‘Current financial conditions’ fell by 4.8 per cent; while ‘Time to buy a major household item’ rose by 3.7 per cent, its third consecutive weekly gain, to 7-week highs.
• The 4-week average (smoothed measure) on inflation expectations remained at 5.4 per cent.

Minutes of September 6 Reserve Bank Board meeting

• The Reserve Bank Board is getting closer to lifting rates by 25 basis points (bp) rather than 50bp. Board members considered a smaller 25bp rate hike at the September meeting. There was no record at the August meeting that a 25bp move had been considered.
• “They discussed the arguments around raising interest rates by either 25 basis points or 50 basis points. Members emphasised that price stability is a prerequisite for a strong economy and a sustained period of full employment. They acknowledged that monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings. Given the importance of returning inflation to target, the potential damage to the economy from persistent high inflation and the still relatively low level of the cash rate, the Board decided to increase the cash rate by a further 50 basis points.”
• “All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.”
• “Retailers in the Bank’s liaison program had indicated that consumption behaviour was changing only slowly in response to cost-of-living pressures. Spending overseas by Australian residents had also grown strongly over prior months, which – although it would not add to domestic demand – was consistent with the ongoing rebalancing towards pre-pandemic patterns of spending. Members noted that domestic activity would benefit from increased numbers of foreign tourists and students, which are recorded as services exports.”