• 

  Consumer sentiment has lifted.

  Economy-wide spending grew at “normal” pace in August, moving the sales expansion into the fourth year. The Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending – rose by 0.5 per cent in trend terms in August – in line with the long-term average growth pace. Sales have grown consistently over the past 37 months.

• The more volatile seasonally adjusted estimate of spending rose by 0.8 per cent in August, the fifth gain in six months and following on from a 1.6 per cent lift in July sales. Annual growth in sales eased from 11.9 per cent to 9.9 per cent – but above the 6.4 per cent long-term average.
• The seasonally adjusted and trend estimates of the BSI results are derived via the SEASABS statistical program from the Australian Bureau of Statistics.
• At a sectoral level, only four of the 19 industry sectors contracted in trend terms in August, up from three sectors in both June and July. But sales only fell in one of the State & territories in August.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. The BSI covers spending broadly across the economy rather than just retail sales, including spending on automobiles, personal services and airlines.

What does it all mean?

• Aussie consumers are getting on with life. Consumer sentiment has lifted, wealth is near record highs, dividends are boosting family incomes and jobs are being created.
• Retailers still have some work to do to convert better consumer sentiment to increased sales. There is so much competition from businesses across Australia and across the world, so the offering needs to stand out in quality and price. But household disposable income lifted by 4.7 per cent in the year to June – the fastest growth in two years. Wage growth is more modest but wages only account for 55 per cent of household income.
• The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, grew for the 37th straight month in August. While trend growth of 0.5 per cent in the month was in line with the long-term average pace of growth, it was the weakest growth since July 2013.
• In annual terms, the BSI continued to grow above the long-term average or normal growth pace. In August the BSI was up by 9.8 per cent on a year earlier, up from 9.5 per cent in June and 9.7 per cent in July but above the 6.2 per cent long-term average growth pace.
• The seasonally-adjusted measure of sales rose by 0.8 per cent in August, down from a revised 1.6 per cent lift in July (originally reported as 1.7 per cent) and the seventh gain in nine months. Annual growth eased from a six-month high of 11.9 per cent to 9.9 per cent in August.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with its retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results are derived from the same SEASABS statistical software. This allows analysis of the broader underlying trends that may be hidden in the raw data.
• Across sectors, spending fell in just four of the 19 industry sectors in trend terms in August: Utilities (down 1.7 per cent); Clothing Stores (down 1.4 per cent); Amusement & Entertainment (down 0.2 per cent); and Automobile/Vehicle Rentals (down 0.1 per cent).
• Amongst the strongest sectors in August were, Service Providers (up 4.0 per cent); Mail Order/Telephone Order Providers (up 2.3 per cent); Airlines (up 1.9 per cent); and Miscellaneous Stores (up 1.4 per cent).
• In annual terms in August, only three of the 19 industry sectors contracted: Utilities, Automobile/Vehicle Rentals, and Clothing Stores.
• At the other end of the scale, sectors with strongest annual growth in August included Amusement & Entertainment; Hotels & Motels; Mail Order/Telephone Order Providers; and Transportation.
• Across the states and territories, sales rose in August in trend terms in all but the ACT (down 0.1 per cent).
• Of the other states & territories, leading the gains was South Australia (up 1.4 per cent), followed by Queensland (up 1.1 per cent) Tasmania (up 1.0 per cent); NSW (up 0.5 per cent), Victoria (up 0.4 per cent), Northern Territory (up by 0.2 per cent) and Western Australia (up by 0.1 per cent).
• The trend BSI has now risen for 38 straight months in Queensland, for 30 months in Tasmania, for 24 months in NSW and for 23 months in South Australia. Sales in Victoria have been either flat or higher for 38 consecutive months
• In annual terms, only the ACT had sales below a year ago. At the other end of the scale, growth was strongest in South Australia, Queensland, Tasmania and NSW.
• The Commonwealth Bank releases its Business Sales Index around the 20^th each month. The data provides a broader perspective of consumer spending. The Business Sales Indicator includes transactions made at traditional retail establishments such as supermarkets, clothing stores and cafes & restaurants and as such is more comparable to the ABS Household Final Consumption Expenditure released on a quarterly basis. The Business Sales Indicator also covers businesses such as airlines, car dealers and utilities such as water and electricity companies as well as motels, business, professional and government services and wholesalers
• The economy is showing positive signs but the Reserve Bank will be in no rush to change interest rate settings.
• With wages growing at a slower rate than prices, retailers will continue to find the going tough.

What does the data show?

• The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, grew for the 37th straight month in August. While trend growth of 0.5 per cent in the month was in line with the long-term average pace of growth, it was the weakest growth since July 2013.
• In annual terms, the BSI continued to grow above the long-term average or normal growth pace. In August the BSI was up by 9.8 per cent on a year earlier, up from 9.5 per cent in June and 9.7 per cent in July but above the 6.2 per cent long-term average growth pace.
• The seasonally-adjusted measure of sales rose by 0.8 per cent in August, down from a revised 1.6 per cent lift in July (originally reported as 1.7 per cent) and the seventh gain in nine months. Annual growth eased from a six-month high of 11.9 per cent to 9.9 per cent in August.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with its retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results are derived from the same SEASABS statistical software. This allows analysis of the broader underlying trends that may be hidden in the raw data.
• Across sectors, spending fell in just four of the 19 industry sectors in trend terms in August: Utilities (down 1.7 per cent); Clothing Stores (down 1.4 per cent); Amusement & Entertainment (down 0.2 per cent); and Automobile/Vehicle Rentals (down 0.1 per cent).
• Amongst the strongest sectors in August were, Service Providers (up 4.0 per cent); Mail Order/Telephone Order Providers (up 2.3 per cent); Airlines (up 1.9 per cent); and Miscellaneous Stores (up 1.4 per cent).
• In annual terms in August, only three of the 19 industry sectors contracted: Utilities, Automobile/Vehicle Rentals, and Clothing Stores.
• At the other end of the scale, sectors with strongest annual growth in August included Amusement & Entertainment; Hotels & Motels; Mail Order/Telephone Order Providers; and Transportation.
• Across the states and territories, sales rose in August in trend terms in all but the ACT (down 0.1 per cent).
• Of the other states & territories, leading the gains was South Australia (up 1.4 per cent), followed by Queensland (up 1.1 per cent) Tasmania (up 1.0 per cent); NSW (up 0.5 per cent), Victoria (up 0.4 per cent), Northern Territory (up by 0.2 per cent) and Western Australia (up by 0.1 per cent).
• The trend BSI has now risen for 38 straight months in Queensland, for 30 months in Tasmania, for 24 months in NSW and for 23 months in South Australia. Sales in Victoria have been either flat or higher for 38 consecutive months
• In annual terms, only the ACT had sales below a year ago. At the other end of the scale, growth was strongest in South Australia, Queensland, Tasmania and NSW.

What is the importance of the report?

• The Commonwealth Bank releases its Business Sales Index around the 20^th each month. The data provides a broader perspective of consumer spending. The Business Sales Indicator includes transactions made at traditional retail establishments such as supermarkets, clothing stores and cafes & restaurants and as such is more comparable to the ABS Household Final Consumption Expenditure released on a quarterly basis. The Business Sales Indicator also covers businesses such as airlines, car dealers and utilities such as water and electricity companies as well as motels, business, professional and government services and wholesalers

What are the implications for interest rates and investors?

• The economy is showing positive signs but the Reserve Bank will be in no rush to change interest rate settings.
• With wages growing at a slower rate than prices, retailers will continue to find the going tough.

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Weekly Consumer Confidence; Reserve Bank Governor Speech

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  Consumer confidence high

  Consumer confidence rebounds: The ANZ-Roy Morgan Consumer Confidence Rating rose by 4.4 per cent to a 13-week high of 113.5 in the week to July 20. Since 1973, the average confidence reading in July has been 106.2.

• Reserve Bank Governor Speech: The Reserve Bank Governor, Glenn Stevens, has delivered a speech entitled “Challenges for Economic Policy”. At the outset, the Governor noted: “I wish to be clear at the outset that my remarks today are about global issues, and contain no particular message specific to Australia.”

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• Consumer sentiment fell by 3% in February to its lowest level since May last year.
• Sentiment declined for a third month in a row as expectations of further RBA interest rate cuts dissipated.
• A soft jobs market is also weighing on consumer sentiment.  The Unemployment Expectations Index rose by 2.3% in February – its sixth consecutive monthly rise.

The Westpac‑Melbourne Institute Index of Consumer Sentiment fell to 100.2 in February to sit barely in positive territory (100 means that the number of optimists equals the number of pessimists).  Sentiment is 7.5% lower than it was a year ago.  The result is in stark contrast to business confidence, which rose for the first time in four months in January.

Sentiment has trended down over the past three months.  A weak jobs market has exerted downward pressure on consumer confidence.  And this has been compounded over the past month by a lift in inflation which has ruled out the prospect of near term rate cuts.

RBA meetings always attract media attention.  And the message following last Tuesday’s meeting from RBA Governor Glenn Stevens was telling with the removal of the RBA’s mild easing bias.  Namely, that the Bank is less comfortable with the inflation outlook.  So in our view the further rate cuts are off the table.

A soft jobs market has opened up the gap between wages growth and domestic inflation.  This means that consumers feel cost of living pressures more acutely.  This has weighed on the two family finances component indices.  Recent falls in global share markets are also likely to have weighed on sentiment over the month.

Looking through the detail reveals that four of the five component indices decreased in February.  The largest falls were in the component indices about economic conditions next 12 months (‑7.1%) and 5 years (‑4.6%).  This was followed by the component index about family finances vs a year ago.

The fall in consumer sentiment goes against the sustained uptrend in retail sales observed since August – there is usually a positive correlation between the two.  The latest retail trade figures show that consumer spending at domestic retailers held up well over the Christmas period while sentiment has slid.  If we marry the sentiment figures with the retail trade figures then it looks like consumers are redirecting spending onshore due to a lower AUD rather than spending more.

The time to buy a dwelling index fell slightly over the month, most likely due to consumers registering the message from the RBA that interest rates are unlikely to fall further.

The Westpac‑Melbourne Institute unemployment expectations index was also published today. It rose by 2.3% in February and has risen in each of the past six months.  It is at a high level overall, confirming consumer fears over job security remain elevated.  Weak official jobs figures and significant media coverage around concerns over Australia’s manufacturing industry have contributed to unemployment fears.

The focus now turns to jobs figures for January, published tomorrow.

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• Consumer sentiment rose by 1.9% in November to be 5.8% higher than a year ago.
• Sentiment is around its three year high.
• Low mortgage rates, strong house and share price growth, and an elevated currency are keeping consumer confidence buoyant.
• Confidence amongst renters, however, has dipped due to rising property prices reducing affordability.
• The Westpac‑Melbourne Institute unemployment expectations index rose by 0.9% following a small lift in October.  It is at a high level overall which indicates consumer fears over job security remain elevated.

 Summary

Consumer sentiment on the rise.

Sentiment is impacted by a number of different economic, social and political influences.  And a number of factors are keeping total consumer confidence at an elevated level.  But looking at consumer confidence by demographics shows that while confidence amongst home owners has soared by 11.6% over the year (6.1% over the month), sentiment amongst tenants has declined over the year by 11.6%.  This is due to the rapid increase in house prices.

Rising property prices are a double‑edged sword for consumer sentiment.  For home owners, rising property prices improves confidence by strengthening balance sheets through a lift in net worth.  But for tenants, many of whom are prospective home owners, the recent appreciation in property prices reduces affordability and therefore dampens confidence.  Sentiment is generally about relative, not absolute, position.  So as renters fell relatively worse off compared to home owners, the gap in consumer confidence widens accordingly.  The time to buy a dwelling index rose by 4.4% in November, most likely due to expectations of further house price appreciation.

In addition to rising property prices, low interest rates are boosting confidence amongst people with a mortgage and people carrying debt.  Low interest rates means lower monthly mortgage repayments, the ability to repay debt quicker or cheaper new debt.  Savers, however, are losers when rates go down as deposit rates fall.  But the gain to borrowers tends to have a more positive reaction than the negative reaction by savers.  Particularly given some of the largest savers are people who own their homes outright and are currently benefitting from strong house price growth.

Equities are also up and the stock market is at 5‑year highs.  Like property, rising share prices strengthens household balance sheets.  Another factor contributing to positive sentiment is the elevated AUD.  After a dip around the middle of the year, the Aussie dollar was trading around 95 US cents when this month’s survey was taken.  To consumers, this means both cheaper overseas holidays and cheaper online shopping at intentional retailers.  And a stronger local currency is also perceived as a sign of economic strength.

Four of the five components of the headline index increased in November.  The largest increase was in family finances versus a year ago (13.3%).  This was followed by the good or bad time to buy a major household item (+4.4%).  The economic conditions next 5 years (+0.5%) and next 12 months (+0.4%) recorded small increases over the month.  The component index about family finances next 12 months fell solidly (‑7.9%).

The Westpac‑Melbourne Institute Unemployment Expectations Index was also published today.  It rose by 0.9% in November following an increase of 0.6% in October.  Despite the unemployment rate remaining around 5¾%, employment growth is weak and job vacancies are low.  As such, consumer concerns about job security are elevated.

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Consumer sentiment on the increase.

Consumer sentiment rose by 3.5% in August to be 9.4% higher than a year ago

Analysis

The Westpac‑Melbourne Institute of Consumer Sentiment pushed higher by 3.5% in August.  The lift in sentiment took the index to 105.7, its highest reading since March 2013.  A level above 100 means that the number of optimists outweighs the number of pessimists.  Sentiment is now 9.4% higher than it was a year ago.

There are a number of different economic, social and political influences and outcomes that affect consumer sentiment.  The best way to analyse what drove a shift in sentiment over any given month is to look at what changed in that particular month.  The key event for households which took place over the past month was the RBA’s interest rate cut to a record low of 2.5%.  While cutting rates is associated with a slowing economy, the consumer reaction is generally different.  A lower cash rate means lower mortgage rates.  And this means lower monthly mortgage repayments, the ability to repay debt quicker or cheaper new debt.  All of these three factors are positive for consumer sentiment.  Savers, however, are losers when rates go down.  But the gain to borrowers tends to have a more positive reaction than the negative reaction by savers.

A rate cut wasn’t the only factor that contributed to a lift in sentiment over the month.  Since the last reading was taken, the Government announced an early election date of 7 September.  Consumers like certainty.  And a firm election date eliminates the uncertainty of when households will go to the polling both.  Also, over the month, shares and house prices moved higher.  As a result, households felt the positive wealth effects of rising asset prices.  So while the RBA has cut rates due to softening demand and concerns over the economy, consumer fears about the economy are mitigated by rising assets prices – “why would asset prices be going up if the outlook was worsening?”  As such, the latest rate cut is viewed as a windfall by households.  Also over the month, the unemployment rate held constant at 5.7%.  And the AUD dipped and then clawed back its falls.  Consumers perceive a fall in the currency as a sign of economic fragility.  So the paring back of earlier falls in the month had a positive impact on consumers.

Of the five components of the headline index, the two family finance indexes drove the lift in sentiment.  This reflects the lift in asset prices and the latest rate cut over the month.  The breakdown by demographics shows that Labor voters (by intention) drove the lift in consumer confidence over the month.  Sentiment was up 12.5% for this group of voters.  On the other hand, sentiment was down 1.4% for Coalition voters.  The change of leadership from Julia Gillard to Kevin Rudd has buoyed sentiment amongst Labor voters.  Unsurprisingly, at a State level, sentiment surged the most in Qld (+11.0%), the Prime Minister’s home State.

All up, a positive reading on consumer sentiment today and one which bodes well for a lift in consumer spending over QIII.

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• However, Aussie consumers still gloomy.  The Westpac/Melbourne Institute index of consumer confidence rose by just 0.3 per cent in June to a reading of 95.6. Any reading below 100 suggests consumers are more pessimistic than optimistic.
• The outlook for family finances in a year’s time has hit a 22-year low.

What does it all mean?

• There were few surprises in the monthly reading on consumer confidence – the Roy Morgan weekly survey had already been released on Tuesday and it showed only a modest lift in consumer spirits. And that is despite a rate cut, good reading on economic growth and solid rise in employment in the latest month. It is clear that some good domestic news was no match for continued gloom about Europe, a volatile sharemarket and weaker Aussie dollar.
• If there was one surprise it was on the outlook for personal finances in a year’s time. The index plunged 7.7 per cent in June to the lowest reading in almost 22 years (since December 1990). Certainly it was the lowest reading since the last recession. Why the gloom about finances? The only identifiable factors are the carbon tax and the European Debt Crisis. Presumably people are worried about what the carbon tax means for their household budgets. There may also been some angst about Europe and whether the sharemarket will recover. But other factors like rate cuts and higher wages are positive for personal finances.
• Where there is real value in the Westpac/Melbourne Institute monthly index of consumer confidence is in the question about the wisest place to put new savings. Still out in front is “banks” – almost 33 per cent believes that the wisest place to put new savings is in bank term deposits or high interest accounts. Mind you it’s banks and not “building societies” (1.1 per cent), “credit unions” (1.1 per cent), or “cash management trusts” (1.6 per cent).
• But the proportion nominating banks as the wisest place for new funds fell in the quarter from 34.6 per cent to 32.6 per cent. The big improver was “real estate”, up from 18.6 per cent to 25.0 per cent and passing “pay debt” with 20.4 per cent. But there was no improvement in “shares” – those nominating it as the best place for new savings stood at 5.3 per cent – the lowest reading in almost 20 years.
• No doubt the fact that interest rates are coming down, immigration is rising and new building remains weak were all aspects causing respondents to nominate property as one of the wisest places for new funds. In other words, demand is expected to rise but the supply of homes is not expected to keep pace, so prices are expected to rise. And the logic is entirely reasonable.

What do the figures show?

• Each quarter the Westpac/Melbourne Institute index of consumer sentiment asks respondents to nominate the wisest places to put new savings. In the June quarter, “banks” were nominated by 32.6 per cent of respondents (down from 34.6 per cent in the March quarter). Next best was “real estate” (25.0 per cent, up from 18.6 per cent), “pay debt” (20.4 per cent, down from 22.7 per cent), “shares” (5.3 per cent, down from 5.4 per cent), and “spend it” (4.8 per cent, unchanged).
• It was the highest reading for “real estate” in almost seven years but lowest reading for “shares” in almost 20 years.
• The index showing whether it was a good time to buy a dwelling rose by 5.9 per cent in the June quarter – up from 120.8 to 128.0.
• The index showing whether it was a good time to buy a car rose by 2.1 per cent in the June quarter – up from 122.1 to 124.7.
• The Westpac/Melbourne Institute index of consumer sentiment rose by 0.3 per cent in June, lifting from 95.3 to 95.6. The index is 5.6 per cent lower than a year ago.
• The current conditions index rose by 6.4 per cent, while the expectations index fell by 3.9 per cent.

Two of the five components of the index rose in June:

• The estimate of family finances compared with a year ago rose by 4.6 per cent
• The estimate of family finances over the next year fell by 7.7 per cent
• Economic conditions over the next 12 months fell by 0.2 per cent
• Economic conditions over the next 5 years fell by 3.8 per cent
• The measure on whether it was a good time to buy a major household item rose by 7.5 per cent.
• Gender & demographics: Men (index reading of 94.2) were less optimistic than women (96.8). Young people (18-24 years) were less optimistic in June (index down 8 per cent to 111.6). But they are still more optimistic than older age groups: 25-44 years, (index 98.9, up 2 per cent); 45 years plus (index 89.5, up 0.7 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 positive views on property purchases represent good news for the beleaguered housing market. Hopefully consumers will follow through on expectations.
• The Reserve Bank would be worried about consumer gloom on the outlook for their finances. Rate cuts must stay on the table.

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• Sentiment levels are still down 5.2 per cent on a year ago. While the 12-month rolling average of the consumer sentiment index hit a 28-month low of 98.9 in February.
• The decision by the Reserve Bank to keep interest rates on hold resulted in “tenants” being a lot more optimistic (up 6.2 per cent) than “households with a mortgage” who were decidedly pessimistic (down 5.4 per cent).
• Sentiment rose in three of the five states with NSW (up 3.2 per cent), Queensland (up 4.1 per cent), and South Australia (up 0.5 per cent). Sentiment fell in Western Australia (down 9.1 per cent) and Victoria (down 7.9 per cent).

What does it all mean?

• While consumer confidence rose over the month, the latest result can only be categorised as mixed. Not only did confidence fall across a couple of the key states but sentiment levels are crawling off a sustained period of weakness. In fact the 12-month rolling average of the consumer sentiment index hit a 28-month low in the latest reading. Far more improvement is required to justify a turnaround in consumer perceptions.
• Keep in mind the latest improvement comes after a period where everything has gone right over the past couple of months. A stronger Aussie dollar, rising share markets, two rate cuts and a modest improvement in the outlook for the global economy have supported confidence levels.
• Interestingly the decision by the Reserve Bank to keep interest rates on hold last week played a big part in the latest result, with confidence receiving a boost from respondents who are renting, and were far more optimistic than respondents with a mortgage. It is important to highlight that just one third of Australians have a mortgage and as such rate cuts have a varied impact across households.
  Overall it is clear that the ongoing global economic troubles will dominate consumer thoughts and it is likely to entrenched the current level of cautiousness. As such we still expect the Reserve Bank to cut interest rates, particularly in light of the latest out of cycle lift in variable rates by the domestic banks.

What do the figures show? 

• The Westpac/Melbourne Institute index of consumer sentiment rose by 4.1 per cent in February after a 2.5 per cent rise in January. The consumer sentiment index is down 5.2 per cent on a year ago. But the 12-month rolling average of the consumer sentiment index hit a 28-month low of 98.9 in February.
• The current conditions index rose by 3.8 per cent, while the expectations index rose by 4.4 per cent.

All five components of the index rose in February:

• The estimate of family finances compared with a year ago rose by 7.0 per cent
• The estimate of family finances over the next year rose by 2.6 per cent
• Economic conditions over the next 12 months was higher by 0.9 per cent
• Economic conditions over the next 5 years rose by 9.9 per cent
• The measure on whether it was a good time to buy a major household item rose by 1.8 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?
Consumers still harbour reservations about what lies ahead and if consumer sentiment doesn’t lift markedly over the next few months, retailers and policymakers alike would have a genuine reason to be very worried. CommSec expects the Reserve Bank to cut interest rates once again in May in an attempt to shore up domestic confidence.

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• The 12-month rolling average of the consumer sentiment index hit a 27-month low of 99.4 in January.
• Car sales down again: New car sales fell by 2.9 per cent in seasonally adjusted terms in December, after falling by 0.6 per cent in November. The slide was largely due to a sharp fall in the sale of “other vehicles” (trucks, utes etc) which fell by 12.4 per cent.
• Overall car sales are down 3.0 per cent on a year ago. Passenger vehicle sales are down 9.3 per cent, SUVs are 24.8 per cent higher and “other vehicles” are down by 13.3 per cent.

What does it all mean?

• While consumer confidence rose over the month, the latest result can only be categorised as disappointing. There is not much more that could have gone right over the past couple of weeks to cheer up consumers. Notwithstanding a stronger Aussie dollar, rising share markets, two rate cuts and a modest improvement in the outlook for the global economy, the consumer sentiment index remains below 100, indicating that consumers are still pessimistic.
• It seems as though the ongoing global economic troubles have altered consumer perceptions and entrenched the current level of cautiousness. Overall most consumers still harbour doubts that the global financial crisis is truly over. In fact the 12-month rolling average on consumer confidence – a more smoothed longer term reading – is holding at a 27 month low.
• Consumers are clearly battening down the hatches, using savings to cut their debt levels, unwilling to take on risk and curbing spending. The latest result doesn’t bode well for retailers who have been facing tough trading conditions for some time now.
• The latest car sales result highlights the unwillingness by consumers to spend on big ticket items. Car sales are now down 3 per cent on a year ago. Overall the sector is now back on an even keel, however it will take an improvement in economic conditions to prompt consumers to commit to larger purchases.
• Certainly the underlying conditions for the car market remain positive. Unemployment is low, wages are rising and car affordability is the best since the mid-1970s. In addition a further rate cut should help to boost consumer confidence and support activity levels.
• The data over the past couple of weeks have shown no clear signs of substantial or sustainable improvement in economic conditions. And given the subdued level of confidence the Reserve Bank has plenty of scope to cut interest rates once more in February.

What do the figures show?

• The Westpac/Melbourne Institute index of consumer sentiment rose by 2.4 per cent in January after a slide of 8.4 per cent in December. The consumer sentiment index is down 7.2 per cent on a year ago. But the 12-month rolling average of the consumer sentiment index hit a 27-month low of 99.4 in January.
• The current conditions index rose by 0.5 per cent, while the expectations index rose by 3.9 per cent.
• Four of the five components of the index rose in January:
  • The estimate of family finances compared with a year ago fell by 2.5 per cent;
  • The estimate of family finances over the next year rose by 0.7 per cent;
  • Economic conditions over the next 12 months was higher by 9.5 per cent;
  • Economic conditions over the next 5 years rose by 2.4 per cent;
  • The measure on whether it was a good time to buy a major household item rose by 2.4 per cent.
• Men (index reading of 105.1) were more optimistic than women (99.4). Young people (18-24 years, index reading 118.6) are still more optimistic than older people (over 45 years; index reading of 97.6).

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.
• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

• Consumers still harbour reservations about what lies ahead and if consumer sentiment doesn’t lift markedly over the next few months, retailers and policymakers alike would have a genuine reason to be very worried. CommSec expects the Reserve Bank to cut interest rates once again in February in an attempt to shore up domestic confidence.

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• Lending to build new homes slumped in January. Loans to build homes fell by 9.4 per cent in January to their lowest level in two years. Loans for the purchase of newly erected dwelling slumped by 13.5 per cent – marking the biggest monthly fall in seven years.
• Overall, the value of housing loans fell by 5.3 per cent in January. The number of loans to owner occupiers down by 4.6 per cent, while investment loans fell by 6.8 per cent.
• The proportion of first home buyers in the market fell from 15.8 per cent to 15.2 per cent of all lending in December – the lowest reading in 6½ years. The size of the average home loan compared with a year ago has fallen for the first time in nine years.
• The Westpac/Melbourne Institute index of consumer confidence eased in the latest month. The index fell by 2.3per cent to a nine-month low of 104.1 in March. Aussie consumers believe that bank deposits are the wisest place for savings (27.1 per cent of respondents), followed by paying debt (22.6 per cent).

What does it all mean?

• Whichever way you look at it, the latest housing finance data clearly highlights just how soft conditions are in the housing sector. Buyers seem to be holding off on purchases in all areas. Loans for the construction of new dwellings – a key forward looking indicator for activity housing activity – fell by almost 10 per cent in just one month and are now holding at the lowest levels since December 2008. While loans to purchase newly established dwellings have recorded the biggest fall in seven years, sliding by over 23 per cent in the space of just two months.
• It’s clear that the double whammy November rate hike is certainly having a profound impact on the housing sector. And the likelihood of further rate hikes and the substantial growth in house prices since the global financial crisis are making potential home buyers rework their sums. And it is not only are owner occupied loans that are falling, with even investor finance on the slide. The slump in investment loans is yet another sign that potential property investors believe that property prices are in for a period of consolidation, and as such can afford to take their time on investment decisions.

• Interestingly the size of the average home loan compared with a year ago, has fallen for the first time in nine years. No doubt the higher home loan interest rates have resulted in potential home buyers only being able to afford less as such it is hardly a surprise that property prices have eased over the last couple of months. Higher interest rates have also resulted in the proportion of loans taken up by first home buyers falling to the lowest levels in 6½ years. The weakness in dwelling activity will no doubt result in more subdued economic growth in the near term
• The latest fall in consumer confidence highlights the cautious attitude displayed by Aussie consumers. The uncertainty about future rates and rising petrol prices.
• Interestingly the latest survey includes respondent’s views on the safest place to park additional funds. And over the past three months consumer’s views have certainly shifted. The safest place for savings still remains the bank, while paying down debt recorded a modest gain. Interestingly the major gainer was investing in shares, which recorded its best reading in 1½ years.

• The talk of further rate hikes has no doubt altered consumer perceptions. Consumers are more likely to use saving, to cut their debt levels or put it in the bank rather than use it for any other purpose. There was even a fall in the gauge of whether it was a good time to buy a home or a car. If the conservatism continues, retailers will have to continue discounting in coming months to generate interest.
• 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?

Housing Finance

• The number of new owner-occupier housing loans fell by 4.5 per cent to 48,871 new commitments. The number of loans is 2.2 per cent lower than a year ago.
• Loans for the construction of homes slumped by 9.4 per cent in January to 4,561 – marking the lowest reading in two years. Loans for the purchase of established dwellings (ex refinancing) fell by 1.3 per cent, while loans for the purchase of newly erected dwelling slumped by 13.5 per cent – marking the biggest monthly fall in seven years. The slide follows a 10.2 per cent fall in December. Refinancing commitments were lower by 6.3 per cent.
• The value of new housing commitments (owner occupier and investment) fell by 5.3 per cent in January. Owneroccupier loans slumped by 4.6 per cent while investment loans fell by 6.8 per cent.
• Banks accounted for 89.3 per cent of all loans taken out in January up from 89.3 in December.
• The proportion of first home buyers in the market fell from 15.8 per cent to 15.2 per cent of all lending in December – the lowest reading in 6½ years and well below the record high of 28.5 per cent set in May 2009. Fixed rate loans accounted for 8.2 per cent of all loans, down from 8.9 per cent of loans in December. And the average home loan across Australia stood at $283,700, down 0.2 per cent on a year ago.

Consumer sentiment

• The Westpac/Melbourne Institute index of consumer sentiment fell by 2.3 per cent in March to 104.1 after rising by 1.9 per cent in January. The latest reading marks the weakest reading in 9 months. The index is now down 11.3 per cent on a year ago.
• The current conditions index fell by 3.6 per cent, while the expectations index fell by 1.5 per cent.
• Four of the five components of the index fell in March:
  • The estimate of family finances compared with a year ago fell by 1.6 per cent;
  • The estimate of family finances over the next year fell by 6.8 per cent;
  • Economic conditions over the next 12 months was higher by 5.7 per cent;
  • The measure of economic conditions over the next five years fell by 2.9 per cent;
  • The measure on whether it was a good time to buy a major household item fell by 4.8 per cent.
• There was a fall in the gauge of whether it was a good time to buy a home (down 3.2 per cent to 114.5). There
  was a more modest fall in the gauge of whether it was a good time to buy a car (down 2.7 per cent to 132.4).
• Aussie consumers believe that bank deposits are the wisest place for savings (27.1 per cent of respondents), followed by paying debt (22.6 per cent), real estate (16.3 per cent), and shares (12.2 per cent).

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• 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 expects the next rate hike to take place in May however there are clearly an array of risks to our call. And if activity levels remain subdued over the next couple of months it is possible the anticipated May rate hike could be pushed out by a month or two.
• 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 the massive rebuilding phase in Queensland will boost spending across an array of sectors.

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The big picture

• The Reserve Bank Governor isn’t one to gloat. But you can certainly sense from the latest interest rate decision that Glenn Stevens is pretty pleased with the state of the economy. Of course it is not just the Governor that can take credit for our laudable circumstances, it is the Reserve Bank Board more generally, as well his executive officers.
• Certainly there is a nice balance to the economy at present. Consumers are reluctant to spend but investment in the resources sector is picking up. The job market is strong, but future employment growth is expected to slow and skill shortages are confined to the resources sector. The floods have caused production losses but rebuilding will provide a mild boost to the economy.
• And then there is inflation – which the RBA continues to describe as ‘moderate’ – with strong competition in some markets, lower wages and a high exchange rate all combining to push underlying inflation to the lower half of the target band.
• Of course, no one said setting monetary policy was easy. Consider the challenges that the economy has faced over the past few years. There was the global financial crisis, a situation that prompted the Reserve Bank to do a ‘U-turn’ on monetary policy and also prompted the government to insulate the economy by boosting spending. And you know what? It worked. Of course there was also the small matter that the economy was very strong just before the GFC struck. And we can also thank the impeccable timing of the Chinese industrialisation.
• With the GFC out of the way, the Reserve Bank wasted no time in lifting interest rates back to ‘normal’ levels. Again, that was not without its risks. If it hiked rates too quick, the economy would risk losing momentum at a crucial juncture. And if it hiked rates too slowly there was the risk that all cylinders would be firing at the same time, leading to higher inflation.
• There is plenty of debate about whether the last rate hike was a step too far, but the Reserve Bank Board can breathe easy for now. The upturn in the Asian economy, and thus demand for Australian raw materials, have served to offset weakness in consumer spending and residential and commercial construction.
• The new age of consumer conservatism has been another challenge for the Reserve Bank Governor together with the renewed uplift in the terms of trade (ratio of export prices to import prices) and, more recently the floods and Cyclone Yasi.
• Now the $64 million dollar question is how long the Reserve Bank will stay on the interest rate sidelines. A rate hike in April can be ruled out, with attention turning to May. But if underlying inflation in the March quarter is still restrained by competition and the exchange rate, then rates are set to stay on hold until perhaps August.

The week ahead

• Last week the ‘autumn avalanche’ hit, with investors inundated by a plethora of economic data releases. The dust is starting to clear, but there is still a healthy offering of statistics on the radar screen over the coming week.
• The week kicks off with the Performance of Construction index to be issued on Monday together with the latest figures on tourist arrivals, departures and migrant flows. The construction industry is doing it tough at present but conditions in the tourism sector are more mixed, despite the lofty Aussie dollar.
• On Tuesday the NAB business survey is released. It’s fair to say that business conditions are challenging at present with conservative consumers, floods, cyclones, rising raw material prices and a firm currency all providing headaches in one shape or form. Businesses will certainly feel more chipper when consumers become more confident.
• And that provides the appropriate lead in to the consumer sentiment figures to be released on Wednesday. In February, the confidence index lifted modestly. But when you smooth out all the bumps, the trend index hit the lowest levels in 20 months. It is hard to see how sentiment could have changed markedly over the past month.
• Also for release on Wednesday is the January housing finance data. Home prices have flattened over the past few months and this has served to bring more buyers out of the cupboards – even with the double-whammy rate hike in November. Lending probably rose by 1.0 per cent in January after lifting by just over 2 per cent in December.
• On Thursday, the latest data on inflation and unemployment expectations will be issued alongside the monthly job data. The job market remains tight, due in large part to Government restrictions on migrant numbers. Employers have no alternative to take on marginal workers and train them up given that they can’t obtain the appropriate skilled staff from abroad. We tip a 20,000 increase in jobs with unemployment around 4.9/5.0 per cent.
• Turning our attention overseas, there are only slim pickings on the US economic calendar over the coming week. On Monday consumer credit figures are released with weekly department store sales on Tuesday and wholesale sales and inventories on Wednesday. On Thursday international trade, weekly jobless claims and monthly federal budget figures are released with retail sales and consumer sentiment data on Friday.
• Economists tip a slight widening in the trade deficit, from US$40.58 billion to US$41.5 billion. And retail sales are expected to have risen by 0.4 per cent in February with a similar 0.4 per cent rise if autos are excluded. US retail sales are surprisingly stronger than the situation in Australia. And if employment rises as expected, sales will get a further kick along.
• Also of note, all of the top-shelf Chinese economic data releases will be issued on Friday including retail sales, production, investment, and the all-important inflation figures.

Sharemarket

• The earnings season is over for another six months, and by and large the results were encouraging. In aggregate, the ASX 200 companies that reported their half-yearly results had earnings up 25 per cent on a year ago with cash on hand up almost 24 per cent. And when you add in the companies reporting full-year earnings, cash on hand at the 152 companies stood at $102.5 billion, up 25 per cent on a year earlier. In short, Aussie companies have cut debt and lifted cash levels to ensure that they are well prepared to meet the difficulties ahead – and there are a few. The Aussie dollar is still high, making life difficult for exporters, import-competing businesses, global companies and retailers. Then there are the vagaries of the weather, providing further challenges. Consumers still won’t spend. And raw material prices are at lofty levels and continue to rise.
• Overall company profits are still outpacing share prices. The gap should close by share prices lifting to meet the higher earnings, but of course the difficulty is working on when, and how quickly, this will occur. CommSec believes that a combination of solid earnings and a lower Aussie dollar will serve to drive the sharemarket higher in the second half of 2011. We are sticking to our view that the All Ordinaries/ASX 200 will be near 5,400 points by end year.
• Happy Anniversary! On March 6 2009 the All Ordinaries fell to lows of 3111.7 with the ASX 200 at 3145.5. But it was at that point that the new bull market began with investors concluding that stocks had fallen too far in response to the global financial crisis. In the period since, the All Ords has rebounded by just over 57 per cent with the ASX 200 up almost 53 per cent. Investors that have held the faith have been rewarded.

Interest rates, currencies & commodities

• Our currency strategists are sticking with their long-held forecasts – and with good reason, because they remain on the money. The Aussie dollar had been expected to be around US102 cents at the end of March, and that still appears a reasonable bet. The US economic expansion was expected to broaden, raising the prospect of higher US interest rates, and lifting the greenback – especially over the second half of the year. That view also looks reasonable given recent data. The CBA strategists are tipping the Aussie dollar to ease to around US99 cents in June, US94 cents by September and US92 cents by the end of the year.

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