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Asia-Pacific Week Ahead (Oct 14-18): Australia’s Consumers Lose Confidence As Wage Concerns Grow

By:

Senior Market Analyst at Interactive Brokers

Investors in the week ahead will be eyeing the Reserve Bank of Australia’s latest meeting minutes, as well as incoming labor market data, for further clues into the country’s downbeat consumer backdrop. 

While the RBA has joined the chorus of several other global central banks in what seems to be a concerted shift towards boosting economic growth by easing monetary policy, the outcome to date in Australia appears to have gone counter to expectations.

Evidence to this effect was highlighted Wednesday, when the Westpac-Melbourne Institute Index of Consumer Sentiment fell 5.5% to 92.8 in October from 98.2 in the prior month – and to its lowest level since July 2015, which was when the Chinese share market suffered a sudden 30% drop and reignited fears about China’s economic health.

The latest Consumer Sentiment Index has also fallen by 8.4% since the RBA in June commenced the first of three 25-basis point cuts to its cash rate – now at a historic low of 0.75% — and has declined by 8.6% year-on-year.

Westpac chief economist Bill Evans noted that the latest reading from the index will be “of some concern to the monetary authorities. Typically, an interest rate cut boosts confidence particularly around consumers’ expectations for and assessments of their own finances.”

However, in the October survey, these index components fell by 3.7% and 4.9%, respectively, amid a 6% plunge in assessments for the overall economic outlook over a 12-month period, and a 9.1% drop over a 5-year horizon, despite the lower cash rate.

Evans continued that consumers are “looking behind the reason for the rate cut and, arguably, the absolute level of rates and getting nervous.”

Market Impacts

Meanwhile, fears about Australia’s faltering consumer landscape has spurred losses in its equities market, and a sharp rise in the prices of its government’s debt.

The iShares MSCI Australia ETF (NYSEARCA: EWA), for example, which has among its top holdings financial sector firms such as the Commonwealth Bank of Australia (OTCMKTS: CMWAY) and Westpac Banking Corp (NYSE: WBK), as well as retail giant Woolworths Group (ASX: WOW) – has fallen roughly 5.2% since reaching its latest 52-week peak set in late July, according to the IBKR Trader Workstation.

The precipitous drop in consumer confidence Wednesday, along with lingering fears about the outcome of the U.S.-China trade talks, helped spur the yield on Australia’s 10-year government note to fall roughly 1.2% to 0.878%.

Also, the Australian dollar continues its weakness against the U.S. dollar.

Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that the Aussie continued to grind lower Wednesday, with lower highs for the third consecutive session, “but when everything is said and done, it is little changed on the week.” 

Chandler said that the Australian dollar finished last week near $0.6740, and it was trading unchanged at that level in the Wednesday morning trading session. He added that he suspects “this flagging could be a favorable chart pattern, but the Aussie needs to find better traction soon and ideally rise above $0.6760.”  

Downside Risks Remain in Play

Along with stubbornly low levels of inflation in many parts of the world, the RBA has also pointed to a host of other global downside risks. These mainly include U.S.-China trade-fueled uncertainties over international trade flows, as well as investment and business spending plans.

The RBA argues that central banks’ decisions to embark upon, or maintain existing dovish monetary policy stances, have been formed primarily to combat these threats.

On a domestic level, RBA governor Philip Lowe noted that his primary concern continues to be the outlook for consumption, “with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.”

Indeed, apart from fears about any further impact on China’s or the U.S.’s economic conditions – notably on their manufacturing sectors – from tariffs and other trade-related actions, Australians also seem jittery about their own wage growth, which appears immovable at around 2% a year.

In fact, the RBA said it made the decision to cut the cash rate further in October in large part to support employment and income growth.

The central bank observed that forward-looking indicators of labor demand indicate that employment growth is likely to slow, while wage growth, which is already subdued, is also contending with caps that affect public-sector pay outcomes across the country.

Drag on Retail

The deterioration of consumer sentiment towards spending in October, underscored by a 4.2% decline in the ‘time to buy a major household item’ sub-index – also marking a four-year low – will also likely add to the drag on Australia’s retail sector, which has been pronounced.

Deloitte economists David Rumbens and Emily Dabbs recently noted that Australia’s annual rate of sales volumes growth has “steadily declined” since the start of 2018, and 2018-19 recorded the “weakest result” since the early ‘90’s recession.

Deloitte attributed the erosion in retail sales partly to rising prices, as well as to the country’s drought and the falling Australian dollar, which have “conspired to deliver the fastest rate of retail inflation we have seen in a decade.”

Rumbens and Dabbs added that “it is stronger wage and jobs growth that is needed to turn any improvement into a sustainable lift for retail.”

Meanwhile, other signals from Australia’s shoppers appear to provide further support for the downbeat mood, including a fall in the latest week’s ANZ-Roy Morgan consumer confidence.

After gaining 4.2% in the previous reading, confidence fell 2.1% from the prior week, with a significant plunge of 4.7% and 5.0% in the sub-indices of current and future finances, respectively. 

ANZ senior economist Felicity Emmett noted that ongoing concerns about the medium-term outlook are “weighing down sentiment, although consumers continue to feel okay about their current financial circumstances.”

She continued that this “divergence in thinking possibly explains the modest bounce in retail sales reported last week: consumers recognize the impact of tax and interest rate cuts on their budgets, but are worried about the outlook, and so unwilling to splash the cash.”

Emmett added that the RBA is “likely to be disappointed about the inability for either confidence or spending to lift materially despite significant monetary and fiscal stimulus.”

Economic Calendar

Against this backdrop, investors Monday are set to receive an updated gauge of consumers’ attitudes from the weekly report on ANZ-Roy Morgan Consumer Confidence, as well as the widely anticipated release of the RBA’s meeting minutes.

The releases will be followed Tuesday by fresh figures from Westpac’s Leading Index, and by mid-week, investors will receive an update on Australia’s labor market.

Monday, October 14

ANZ-Roy Morgan Consumer Confidence

Reserve Bank of Australia Meeting Minutes (October 2019)

Tuesday, October 15

Westpac Leading Index MoM (Sept)

Wednesday, October 16

FT/PT/Net Employment Change (Sept)

Unemployment Rate (Sept)

Participation Rate (Sept)

Market participants will likely continue to eye developments on the U.S.-China trade front for any external impacts on Australia’s beleaguered consumer backdrop, as well as the updated data and release of the RBA’s minutes for any further clues into the central bank’s rate cut decision, and if they may have had some effect on the labor market in September or consumer sentiment in the latest week.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

Disclosure: Forex

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