Market Watch: Two faces of confidence

The loudest noises in the macro world this week were once again coming from the White House. Whether it was President Trump himself, or members of his inner-trade circle, it was a particularly vocal week.

The President’s ‘negotiations’ with the North Atlantic Treaty Organisation (NATO) on defence spending was intertwined with ‘commentary’ around Germany’s energy security and the UK’s current standing on how to proceed with Brexit. This led to political panic and European market volatility.

Subtle it was not, and while criticising Europe on its defence spending and dealings with Russia, Trump will meet with the Russian President Putin sometime this coming Tuesday. The outcomes of this are completely unknown – more risk.

However, it was the US trade representative (USTR) Robert Lighthizer’s report into the possible $US200 billion of additional tariffs on China that were most market ‘effective’. The 205-page document covered almost every Chinese export to the US that could potentially be slapped with a 10 per cent tariff as early as September, and showed that the trade war is now moving into a much more volatile stage.

There is no winner here, and from a markets perspective it’s the impact on growth that is most regrettable, having finally recovered from the effects of the GFC.

The data points of the week:

NAB Business Survey: Conditions masking confidence

Conditions continued to boom, at 15, up one point month-on-month and on a consistent three-month basis conditions remains at record. Confidence, however, eased slightly to 6. Although this is still well and truly in positive territory, if you look at the mean average over the life of the survey, confidence has averaged 7. This means business confidence has started to slow and is below average.

The components of the survey are also interesting: trading conditions ( 23) and profitability ( 17) are at or near record levels. However, what began to ease is employment ( 5) and future orders ( 2). This is in stark contract to the service and manufacturing PMI data from last week, both of which are booming. Which is right?

Westpac Consumer Confidence: Can the government really take credit?

There was a slight shock from the consumer confidence numbers for July, with the survey jumping 3.9 per cent month-on-month to 106.1 points. That’s its highest read since 2013 and it is now 9.8 per cent higher year-on-year.

The surge in consumer confidence was particularly strong from low to middle-income earners, which benefit the most from the changes to the income tax thresholds that came into effect from July 1 – something the Government is likely to champion.

The surge in confidence was seen across the subsectors, however it’s the ‘family finances’ that caught the most attention. The perception of the family’s finances over the past 12 months increased 2.4 per cent month-on-month, and for the coming 12 months by 2.1 per cent month-on-month. This is a clear relaxation in ‘household finance stress’, which has dragged on the index of late. The ‘time to buy household items’ increased 1.7 per cent over the month, while the ‘time to buy a dwelling’ fell 2.5 per cent month-month. However, it is still up 10 per cent over the year.

If this can continue, we would expect this to filter into consumption and it should be seen in the retail sales and consumption component of the GDP read over the coming months and quarters.

Housing Finance: Dead cat?

Housing finances for owner-occupiers jumped up in May by 1.1 per cent, smashing consensus, which was forecasting a 2 per cent decline month-on-month. However, in year-on-year terms household finances for owner-occupiers has fallen by 2.5 per cent. The monthly increase in owner-occupiers was broad based and consistent across both new ( 1.2 per cent) and established ( 2.1 per cent) dwellings.

However, is this bounce in housing finance a dead cat bounce? It does appear so: in trend terms owner-occupier approvals continue to fall (down -0.7 per cent and -4.2 per cent year-on-year), making it the eighth consecutive month of declines on a trend basis.

The other side of the housing finance story is investor lending, which snapped out of two-month decline and increased by 0.4 per cent month-on-month in May. However, across the year, investor lending is down 15.1 per cent and is showing no real signs of slowing down.

With signs of a credit squeeze, banks increasing lending regulation even before the findings from the Banking Royal Commission, and a slowing housing market, the numbers do appear to be a dead cat bounce.