Cliff Notes: consumers and central banks seek confidence
Key insights from the week that was.
In Australia, Westpac-MI Consumer Sentiment is still yet to show any material signs of recovery. In May, the headline index remained locked in deeply pessimistic territory, moving 0.3% lower to 82.2. The latest update captured consumer reactions to the Federal Budget, which included a number of cost-of-living relief measures. The Budget was well received, with fewer households than usual expecting to be ‘worse off’ post-Budget than traditionally is the case. That said, the survey suggests households plan to save around 80% of the benefit from the Stage 3 tax cuts. Such an outcome would aid the RBA in their goal to ensure inflation returns to, and remains sustainably, at target.
Here and now however, headwinds continue to be felt. The sub-index tracking family finances versus a year ago fell 3.6% to 63.2, while views on ‘time to buy a major household item’ declined 2.8% to 76.5; these indexes are now 28% and 39% below their respective long-run averages. The higher-than-expected Q1 inflation outcome is likely the chief culprit, and helps explain the positive reception the Budget has received. Thankfully, forward views on finances continue to improve, ‘finances next twelve months’ rising another 0.7% to 96.1, only 10% below the long-run average. Also encouraging is that the one-year and five-year economic outlook measures remain constructive, lifting 0.7% and 2.6% respectively, the 5-year view now in line with the historic average.
The RBA May Minutes provided more colour around the Board’s deliberations, in particular the considerations for monetary policy of stronger-than-expected inflation outcomes. The case for another hike was premised on risk judgements, the two main considerations being that staff forecasts could be viewed as “overly optimistic about the forces that would drive down inflation” and that consumption may “pick up somewhat more rapidly if labour market outcomes remained benign”. The case for leaving policy unchanged was deemed stronger though, the Board of the view that, while recent updates have slightly tilted the balance of risks, it is not to the degree that warrants further tightening. The Board expects inflation to continue decelerating towards target as demand and supply come into better balance, but it needs more confidence in this view before debating the timing and scale of easing. We continue to believe the Board will have this confidence by November, allowing the RBA to embark on a measured rate cutting cycle, 25bps per quarter to 3.10% in Q4 2025. The coordination between fiscal and monetary policy frameworks was explored in this week’s essay from Chief Economist Luci Ellis.
The RBNZ’s May Monetary Policy Statement meanwhile highlighted that significant risks remain for New Zealand’s inflation outlook. Inflation is forecast to fall back into the 1-3% band at the end of 2024, but is now not anticipated to return to the 2% mid-point until mid-2026. The RBNZ cash rate track points to the risk of another hike in late-2024 and the first cut not occurring until August 2025. Westpac remains of the view that the first cut will come earlier, in February 2025; but that the ensuing cutting cycle will be gradual, and the end-point in mid-2026 100bps above the RBNZ’s upwardly revised estimate of neutral (3.75% versus 2.75%).
Further afield, S&P Global flash PMIs for May were constructive regarding activity but highlighted lingering inflation risks. The US measures received the most attention, the services PMI jumping 3.5pts, while the manufacturing PMI retraced half April’s loss. Unnerving some participants was an acceleration in input prices for manufacturing and services; however, output prices were little changed in the month, and all of the price indexes remain well below the elevated readings of 2021-23. If employment slows in coming months, as this survey suggests, further pressure will be placed on output prices. As alluded to by FOMC members and the minutes this week (see below), inflation risks remain; but a return to, or very near, the 2.0% inflation target during the next 6-12 months is most probable.
Over in the UK, the service and manufacturing indexes came in below the market’s expectations and April’s outcomes, but were still expansionary. Helpfully, UK businesses reported that cost and wage pressures continue to abate, setting the scene for rate relief later in 2024 despite the latest CPI report coming in above expectations – April seeing a headline rise of 0.3% against the consensus estimate of 0.1% as services inflation held up. The Euro Area results also point to abating consumer price risks; input prices continue to grow at a robust pace, but selling prices are under pressure. As the ECB begins to cut interest rates from mid-year, the services sector should gain further strength. Having recovered to a 15-month high, the manufacturing index suggests European manufacturers are ready to benefit from stronger growth at home and abroad. This is also the case for Japan’s manufacturers, the Jibun manufacturing PMI returning to growth in May after almost 18 months of contraction. Japan’s service sector meanwhile continues to benefit from Yen weakness and nascent positive real income growth amongst households.
With other data inconsequential, for much of the week, the market again focused on the subtleties of US FOMC policy guidance. From the minutes and the members who spoke, the message was clear: as yet, the FOMC do not have enough confidence in the inflation outlook to begin cutting; but policy is considered restrictive and effective; hence a return to target inflation is believed to be only a matter of time, with further tightening only required if inflation surprises to the upside.
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