The best guide to the strength, veracity and appropriateness of the budget lies not what in you or I might think about it, but rather, how the financial markets have reacted to it.
Financial markets have a habit of going for the jugular when an economy is on its knees or when fiscal policy is inept, broken or unsustainable.
Poor or misguided economic policy, bad economic news or heightened risks of government financial troubles will be met with heavy bond selling, the risk of a stock market rout and even a move on currency markets.
Now that the markets have had 12 full hours to examine Australia’s government finances, plus a lot of extra time in the days and weeks past as a lot of information has seeped out into the public domain, how have they reacted?
To the bond market first. During trade yesterday, the 3-year government bond was trading around 2.57 per cent, plus or minus a few one-hundredths of a percentage point. The 10-year government yield was trading around 3.24 per cent, give or take a little.
In overnight futures trading, the 3-year yield has risen to 2.61 per cent while the 10-year yield is 3.28 per cent. In other words, bond yields are around 4 basis points higher. This rise in yields has matched the sell-off in the US, no more or less, which is a sure sign that the local bond market is agnostic when it comes to assessments about the budget. The concerns about a budget “in chaos”, the government “losing control of fiscal policy” and all the other emotive analysis is not reflected in the bond market.
The bond market reaction was undoubtedly helped by the announcement of Moody’s ratings agency to affirm Australia’s triple-A credit rating after it saw the budget and the profile for the budget to move to surplus and confirmation that net government debt will remain at wafer-thin levels at 11.4 per cent of GDP.
Standard and Poor’s also maintained the triple-A credit rating noting that “the government continues to demonstrate a commitment to prudent fiscal policy over the medium term”.
In terms of stocks, the ASX200 had yet another solid day yesterday, rising 0.4 per cent to 5221 points, a fresh five-year high and up some 30 per cent since the middle of last year. Overnight, in the wake of the budget news and, of course, more importantly, a positive lead from US stock trading, the futures market is 25 points stronger again.
No sign of investors wanting to take their money out of the Aussie stock market because the budget is in “tatters”.
For the currency market, the Australian dollar continued its move lower, and is currently trading just off the low point at 98.90 US cents. It must be said that the US dollar was stronger against the euro and British pound, for example. But those reading the Treasury budget papers closely would have noted analysis that suggested the Australian dollar is overvalued relative to the terms of trade which may have continued the market’s reassessment that the Aussie dollar was well overdue for a correction.
The Australian dollar decline has occurred even though there are no obvious signs of selling from global investors wanting to sell other Australian assets. In other words, the traders and investors are looking at issues outside the budget and fiscal policy for guidance.
The market has seen the budget, witnessed the evolution of the various spending and revenue measures and its verdict from a trading perspective is obviously neutral.
The bottom line is that Australia’s budget and fiscal settings are in sound shape. There are small budget deficits forecast for the next two years and there is a return to surplus after that. At the same time, the level of net government debt will peak at 11.4 per cent of GDP – a figure that would not see any ratings agency or international investor blink an eye.
With the budget out of the way, it is back on to inflation, global economy and monetary policy watch.