WESTPAC: Australians are feeling confident, but the RBA's still likely to cut interest rates

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Australian consumer sentiment fell fractionally in June, consolidating on the enormous gain previously recorded in May.

The latest Westpac-MI consumer confidence index slipped by 1% to 102.2, leaving the index near levels last seen at the start of 2014.

In May the index surged by 8.5% — its largest one-month percentage gain since June 2010 — leaving the index at the highest level seen since January 2014.

Despite the small decline, optimists have now outnumbered pessimists for the past two months, the first time this has occurred since late 2015.

“Coming after an 8.5% surge in May, the small decline in June mostly represents a consolidation at improved levels,” said Matthew Hassan, senior economist at Westpac.

“Last month’s surprise rate cut from the RBA was the main catalyst behind May’s rally and although confidence has slipped back a touch in June, this is a fairly common pattern following an interest rate driven bounce.”

According to Westpac, the decline in June was entirely driven by a deterioration in sentiment towards the outlook for the economy, offsetting continued strength in views towards family finances.

“The component detail behind the headline sentiment index showed firmer reads on ‘family finances’ but a softening in expectations for the economy,” said Hassan.

“Most notably, the sub-index tracking respondents’ assessments of ‘family finances compared to a year ago’ – a component the RBA has emphasised as an indicator of demand – increased 4.3%.”

Looking further ahead, the gauge measuring expectations for finances in 12 months time rose by 0.2%, leaving it 11.4% higher than the levels of a year ago.

Offsetting those improvements, Hassan notes that sentiment towards the economy softened, partially retracing the enormous gains seen in May.

“The sub-indexes tracking the one and five year outlook declined 3.8% and 5.2% respectively, with falls following particularly strong gains in May, of 13.2% and 14.8% respectively,” he said.

Despite the monthly weakness, both indices are up 15.3% and 13.3% from the levels of a year earlier, indicating a broad-based improvement in views towards the outlook for the Australian economy.

The final component of the index — whether now was a good time to buy a major household item — was unchanged from May.

The table below, supplied by Westpac, looks at the individual movements in each survey category, both from a month earlier and compared to June 2015.

While sentiment remains at elevated levels — at least compared to recent norms — Hassan notes that respondents continued to display caution when it came to the outlook for financial markets.

“The proportion of consumers nominating ‘pay down debt’ fell from 24.4% in March to 20% in June. This compares to an average reading of 17% in 2015,” said Hassan.

“Consumers continue to heavily favour ‘safe’ options as well, with the proportion nominating bank deposits rising from 27.4% in March to 29.5% in June.

“That contrasts with continued lower readings for the proportion nominating real estate (15.8% in June vs 14.7% in March and average 25.4% in 2015) and shares (8.0% in June vs 7.6% in March and an average of 8.9% in 2015).”

On housing, Hassan notes that the survey’s time to buy a dwelling index declined by 2.7% following a 12.1% surge in May. However, the separate house price expectations index rose by a further 3.6%, leaving it at the highest level seen since September last year.

“Both buyer sentiment and price expectations are still well below the readings seen a year ago but have shown a clear firming from the weak levels in early 2016, the RBA’s May rate cut clearly a supporting factor,” says Hassan.

Before the release of Australia’s official jobs report for May on Thursday, there were also signs that confidence towards the labour market is returning with the survey’s unemployment expectations index declining 0.1% to 136.3.

“This index measures respondents’ assessments of the outlook for the unemployment rate so lower reads indicate improved confidence in the employment outlook,” notes Hassan.

“The index has fallen 7.5% over the last three months and is now down 10.9% on levels a year ago but is still 4.9% above its long run average – assessments have shown a steady improvement but are still more negative than usual.”

Despite sentiment levels remaining at relatively high levels — something that suggests household consumption will remain firm in the second half of the year — Hassan believes that the RBA will still cut interest rates in the months ahead.

“The key considerations for the Bank are around the outlook for inflation,” says Hassan.

“The most important and immediate information about whether the RBA’s May assessment is correct will come from the June quarter inflation report which prints on July 27, after the July Board meeting but ahead of the August 2 meeting.

“It is our assessment that the information in this report will confirm to the Board that another cut is indeed necessary.”

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