Markets in Review: The RBA and the confidence factory

This week’s macro data felt like it was straight out of ‘The Good, the Bad and the Ugly’. 

The most interesting discovery was the Reserve Bank of Australia’s (RBA) impact on forward-looking confidence surveys.

The Good: Consumer Confidence

Australian consumer sentiment, as recorded by the Westpac-MI Consumer Sentiment Survey, snapped out of pessimism in February. The score had fallen below 100 points for the first time since early 2017 in the month prior.

Consumer confidence rose 4.2 per cent month-on-month (mom) to 103.8 points.

The snapback was broad-based, but the following stood out in the data set:

• ‘Broader economic conditions’ for next 12 months was up 7.1 per cent mom while ‘next 5 years’ rose 3.8 per cent mom
• Perceptions of family finances increased 5.7 per cent mom compared to a year ago
• Family finances in the coming 12 months jumped 5.5 per cent mom
• ‘Time to buy a dwelling’ did fall mom, down -1.8 per cent, although it remained elevated in year-on-year (yoy) terms, up 8.4 per cent, even with the ongoing fall in house prices

These results were collated the week that the Banking Royal Commission report was handed down and the RBA pivoted to a more neutral position on the cash rate. Both events were received positively by investors.

In an additional question the survey asks every six months on sentiment around ‘mortgage rate outlook’, this fell to just below 43 per cent, making it the lowest reading since August 2016. That just happens to be the last time RBA cut the cash rate.

Another encouraging sign from the Australian consumer is that although there has been some spill over into retail sectors from the cooling housing market, there is little evidence it is impacting broader sentiment. Again, Westpac puts this down to the fact that financial pressure from rates is now expected to ease.

The Bad: Business Confidence and Conditions

Australian business conditions somewhat rebounded in the January survey, jumping up from 4 points to 7.

However, this seems more of a return to trend rather than a move towards the record conditions seen throughout 2018. ‘Confidence’ as a metric moved up from 1 point to 4, but this remains well below the average.

We see most of the flow-on in the employment sub-index. ‘Employment’ rose from 1 to 5 points, but at 5 points, the employment sub-index is still more than 5 points below the 2018 average.

This suggest the 2.5-year jobs surge Australia has seen is likely to slow and return to trend in the coming period. This makes next week’s employment read all the more interesting. If employment is slowing as suggested here, consumer optimism will fall away too in future reads.

The Ugly: Housing Finance

We saw a very sharp decline in housing finance for the month of December. Owner-occupier loans saw a -6.1 per cent mom fall, much sharper than the consensus expectations of -2 per cent mom. This made December 2018 the worst read for housing finance since mid-2011.

Looking to the granular detail, finance approvals for established dwellings, excluding refinancing, fell -9.7 per cent mom and -14.5 per cent yoy. New construction fell -5.5 per cent mom and -20.2 per cent yoy, and refinancing fell -1.7 per cent mom and -5.8 per cent yoy. In short, ugly numbers.

This data is well-correlated with the deterioration in a range of housing market indicators observed over the course of 2018. The data we have received so far in 2019 suggests this trend will continue.

The RBA Effect

The RBA could have a real impact on all three of the above data sets over the coming 12 months. How the Board handles the year ahead will be interesting as it clearly affects credit and confidence.

Even the simple suggestion that our central bank could cut rates this year should positively impact confidence. It could even see market-priced debt (wholesale funding markets) falling in anticipation of a cut, regardless of whether the Board moves or not. This would elevate the credit squeeze on business, homeowners and consumers alike, which are all positives.