WESTPAC: Jobs market optimism means the RBA's rate cutting cycle is likely over

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The Westpac-MI consumer sentiment index continued to push higher in October, confirming the trend seen in the separate ANZ-Roy Morgan consumer confidence index in recent months.

The headline sentiment index rose 1.1% to 102.4, leaving it at the highest level seen since May this year.

The index measures the number of optimists compared to pessimists, with a reading of 100 indicative that the numbers in both camps are equal.

In this instance, optimists outnumber pessimists, albeit by a small margin.

Here’s the trend in the index going back a decade:

According to Bill Evans, chief economist at Westpac, the result extends a remarkable run of stability in the index.

“Over the last six months the Index has held within a relatively tight 4% range with five of the six readings hovering just above 100 indicating that optimists have remained slightly in the ascendancy,” he notes.

Looking through the report, the uptick in October was largely due to improved sentiment towards the near-term economic outlook. Although, like the findings of the ANZ-Roy Morgan survey, pessimists continue to outnumber optimists when it comes to the near-term economic outlook.

“The rise in the index in October is solely attributable to rises in two of its forward-looking components,” he said.

“Specifically, the index relating to family finances next 12 months rose by 0.9 per cent in October while the index relating to economic conditions over next 12 months rose by 5.8 per cent.

“As such, consumers are feeling more optimistic about conditions in the next 12 months.”

The improved outlook helped to offset weaker sentiment towards current finances and whether now was a good time to buy a major household item.

This table from Westpac shows the internal movements of the five survey subindices, comparing not only the movement from September but also the change over the past year:

Interestingly, sentiment among Australians aged 45 years or older was entirely behind the bounce in overall sentiment levels in October, offsetting declines in younger respondents.

Despite the bounce in October, sentiment levels among older Australians continue to lag those seen among younger categories.

Perhaps helping to explain the recent uplift in sentiment levels, and offering hope that the rebound in Australian retail sales in August was not a one-off occurrence, sentiment towards labour market conditions continued to improve.

“Ongoing stability in the labour market has been one likely explanation for the overall boost to confidence,” Evans notes.

“The index of Unemployment Expectations dipped from 138.4 to 138.2. The average print for the index over the last six months is 138.2 – emphasising the stability of the current assessment of the labour market.

“This average read is 8.0% below the average of the same six months a year ago indicating a definite improvement in respondents’ assessments of the conditions in the labour market.”

A lower reading indicates that survey respondents believe unemployment will fall in the period ahead.

That is an important outcome, and one that potentially bodes well for household consumption after a weak outcome in the June quarter this year.

Without job security, or the belief that obtaining employment is improving for those looking for work, consumers are unlikely to feel confident enough to increase their spending levels.

Combined with a potential shift in policy focus from new RBA governor, Philip Lowe, Evans suggests that Australian interest rates are now likely to remain on hold “for the foreseeable future”.

“It has also become clear that the new Governor will give considerable weighting to ‘financial stability’ in his policy deliberations,” says Evans.

“With Sydney house prices having been reported to have lifted by 3.5% and Melbourne by 5% in the last three months, the risks of further boosting housing with another rate cut will be a significant consideration for the Board.

“Indeed, while we give little probability to a further rate cut at the next meeting our assessment of the growth outlook, including the shape of the construction cycle, points to rates remaining on hold for the foreseeable future.”

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