THE BIG PICTURE: Another rate cut likely, but the question is when?

Australian consumers are a gloomy bunch at present. The Reserve Bank delivered a super-sized rate cut, banks passed most of it on, fixed-term rates have fallen to historic lows and the federal budget delivered a range of handouts to lower income families. But despite all that, consumer confidence continues to languish.

There are two gauges of consumer confidence or sentiment. The first is the weekly reading from Roy Morgan – the Consumer Confidence Rating. The second is the monthly Westpac-Melbourne Institute Consumer Sentiment Index. The questions are almost the same and both survey about 1,200 people. The difference is that one survey is monthly, the other weekly. As would be expected, they tend to move together.

The Roy Morgan survey has just been issued, the first gauge of sentiment following not just the budget and rate cut but also the slump in the sharemarket last week. The rate cut and budget were largely shrugged off – results common to both the Westpac and Roy Morgan sentiment surveys. But the Roy Morgan survey has showed that the sharemarket slump has also taken its toll on consumer confidence. The Consumer Confidence Rating fell by 7.5 points to a reading of 108.2 – the lowest result since August 20-21 last year.

All of the five key questions weakened over the past week: personal finances – now and next year; the economy over the next year and 5 years; and whether it was a good time to buy a major household item (like a TV or fridge).

The biggest concern was a drop in the estimate of family finances in a year’s time. While 35% still believe that they will be better off, 25% reckon they will be worse off (net reading +10). That net balance of +10 is the lowest since July 30-31 last year. And it should be no surprise that retail spending stagnated last year, prompting the Reserve Bank to cut rates in both November and December.

While we are pencilling in another rate cut in August – after the next inflation figures – the risk is that the rate cut will be delivered early, with financial markets pricing in a move in June.

The week ahead

As usually happens in the world of economics, one week it’s famine, the next is feast. And so it is with economic data releases in the coming week. After a week without a major domestic data release, in the coming week there is plenty on offer. And in the US, the pivotal employment data for May will be released.

The week kicks off with a speech by the Reserve Bank Governor, Glenn Stevens, on Monday. However as the talk is to the Australian Payments Clearing Association’s 20th Anniversary Symposium, it may not contain a lot of direction on interest rates.

On Tuesday, the Housing Industry Association releases data on new home sales for April.

On Wednesday, the Bureau of Statistics releases April data in retail trade together with March quarter figures on construction work done. In March, retail spending lifted by 0.9% – the strongest gain in 11 months. While the result was encouraging, it will need to be backed up by another solid result in April. We tip a modest 0.3% increase in spending, showing that consumers still remain cautious.

On Thursday, data on building approvals are released alongside private investment and lending (private sector credit). The dwelling approvals data has proved volatile in recent months, lifting 7.4% in March after sliding 8.8% in February. We expect a modest 2% lift in April approvals but, in essence, home construction remains flat. Subdued readings are expected for the other indicators with credit up 0.3% and capital spending up 3% after falling by 0.3% in the December quarter. But the estimates on future investment will be closely checked to see whether a lift in business spending is imminent.

And, on Friday, the pre-eminent measure of home prices in Australia is released – the RP Data/Rismark Home Value index. Prices fell by 0.8% in April after rising 0.2% in March and lifting 0.8% in February. The May reading will prove vital to confirming whether home prices have bottomed. And the Performance of Manufacturing index is issued the same day. The weaker Aussie dollar should support manufacturing activity, but perhaps it’s too early to show up in the May PMI reading.

In the US, the Memorial Day holiday is on Monday and then the week kicks off in earnest on Tuesday with the Case-Shiller index of home prices together with the consumer confidence reading for May. Consumers had been feeling more chipper but the new problems in Europe will probably restrain optimism. A modest lift in the confidence gauge from 69.2 to 70.0 is tipped. Two regional gauges covering Dallas and Chicago are also issued.

On Wednesday, data on pending home sales is released while the ADP Employment index is issued on Thursday together with the Challenger job layoffs index, economic growth (GDP) data and the Chicago Purchasing Managers index. Economists tip a firmer 138,000 lift in private sector jobs while the March quarter estimate of economic growth is expected to be revised down from 2.2% to 2.0%.

And Friday is likely to prove a pivotal day with five key indicators due for release. The May data on non-farm payrolls (employment) is probably the indicator most in the spotlight, while figures on auto sales, construction and personal income are issued alongside the ISM manufacturing index. Economists tip a 150,000 increase in non-farm jobs with private sector payrolls up by 160,000. The jobless rate could ease a touch to 8.1%.
Economists also tip 0.3% gains for both personal income and spending; a 0.4% rise in construction spending; but a modest fall in the ISM gauge from 54.8 to 54.1 – still above 50 so still showing expansion.

Also on the radar screen on Friday are manufacturing readings from European economies and China, which will prove influential for sharemarket investors.

Sharemarket, interest rates, currencies and commodities

Despite another flare up on the European debt crisis, we haven’t revised our forecasts for the Australian sharemarket. Over the first five months of the year the All Ordinaries lifted almost 400 points. Then in the space of 13 days during May, 400 points was wiped off the index as fear took hold. Clearly there is uncertainty about how Greek voters will act in the second attempt at elections on June 17, but we believe that authorities will do what it takes to keep the euro zone together.

Over the year we have consistently maintained that the All Ordinaries index would end the year around 4,650 points (ASX 200 4,600 points) and we see no reason at present to change that forecast – at least until we see how European developments pan out over the next month.

The US economy continues its protracted recovery and we expect Chinese authorities to ease policy in coming months to stimulate activity. At the same time, lower domestic interest rates should prompt more domestic investors to put their money to work in “riskier” assets like shares and property rather than cash. However, we do believe that investors should be maintaining a well-diversified portfolio at present with a tilt to defensive, dividend paying stocks.

How do you benefit from the resources boom? One way is to invest in infrastructure stocks rather than mining and energy. And it pays off. Over the past year the UBS Infrastructure accumulation index has lifted by 12% while the All Ordinaries accumulation index has fallen 9%.

Craig James is the chief economist at CommSec.