WEEKEND ECONOMIST: June jitters

Consumer sentiment in decline suggests dissatisfaction with the federal budget has outweighed May's interest rate cut. Despite the currency's easing effect, there is scope to cut again in June.

Markets are giving us little encouragement for our view that there is a decent case for the Reserve Bank board to cut rates at the June meeting.

Market pricing points to a meagre 20 per cent probability of a cut. That is despite what we consider to be quite a shock with the Westpac-Melbourne Institute Consumer Sentiment Index dropping by a significant 7 per cent in May to 97.6.

The print pushed the index back into a range where pessimists outnumber optimists for the first time since October 2012. It is the lowest read since August 2012.

Over the last two months the index has fallen by 11.7 per cent to fully reverse the promising 9 per cent increase we saw in February and March. Of course, the remarkable aspect of this result is that it is the first read of the index since the Reserve Bank cut the cash rate by 0.25 per cent on May 7.

Absent any other major influences, we would have expected a solid boost to the index following that rate cut. However, since the rate cut we have seen the announcement of the federal budget.

We expect that the dissatisfaction is not only due to concerns around some of the savings measures in the budget but also the sharp deterioration in the fiscal position, indicating renewed fears about the overall state of the economy.

These concerns are also likely to have been fuelled by the surprise fall in the Australian dollar before and during the survey period. Further undermining the assessment of the state of confidence amongst households was the 5.4 per cent increase in the Westpac-Melbourne Institute Index of Unemployment Expectations, following a 1.3 per cent increase last month.

This change has partially redressed the promising 9.6 per cent fall in the index between December and March.

It is back to levels indicating that households expect the unemployment rate to start rising.

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