Stephen Koukoulas, TD Securities
A very stimulatory budget, with income tax cuts amounting to around 1% of GDP per annum over each of the next four years.
Given that the marginal propensity to save for Australian consumers is close to zero or is even negative, we can expect these income tax cuts to be spent and overwhelm the impact of last week's interest rate hike. As a result, there is a greater possibility of another interest rate rise before the end of the year.
It appears that this stimulus is more than the RBA was fearing when it lifted rates last week and with oil prices edging lower, the short end of the yield curve should start to price in an interest rate hike around September or October.
There have been a few peanuts thrown at infrastructure investment and education. These areas identified by many, including the RBA, as factors adding significantly to inflation risks have not been addressed in an adequate manner.
Bond yields should keep rising in reaction to this fiscal easing, while the Australian dollar should gain ground and outperform the dollar bloc.