Today’s retail results speak for themselves, from Westpac:
Retail sales posted a solid 0.5% gain in May, slightly better than the 0.2% gain expected. April’s 0.2% drip was revised up to a 0.1% uptick and March’s 1.1% jump was marked down to a 0.9% gain, smoothing the recent monthly pattern of spending but leaving in place a 0.4% trend rate of growth – a 4.7% annual pace (10yr average is around 5%). The May result suggests rising incomes and interest rate cuts provided more of a lift despite the muted response from consumer sentiment and signs of ongoing cautious behaviour.
Indeed, but what sort of behaviour change? The result was reasonable across the retail sub-sectors but there was one outstanding result:
Cafes and restaurants. That’s discretionary budget all right but not big ticket. It says to me we’re living in a small pleasures economy. Larger discretionary items remain on the nose.
To me this suggests that consumer conservatism remains entrenched but the RBA is succeeding in keeping folks from bunkering, which is precisely what its campaign of rate cuts was designed to achieve; to free extra spending money without triggering a run for larger items involving an extension of debt. Here’s the discount mortgage rate:
Correlation isn’t causation of course but it’s not irrelevant either.
The dollar spiked impressively on the retail data, clearly reading it as a signal for fewer rate cuts ahead:
As did stocks and interest rate markets also knocked a couple of basis points off expected rate cuts over the next twelve months:
Both reactions are probably right (in relative terms). Today’s figures are probably evidence that the RBA is having an effect and therefore the likelihood of further cuts is commensurately diminished. But, as I’ve argued before, there’s also good reason to think that this flourish won’ t last. The retail bounces of last year, after the collapse of the bullhawkian panic mid year and then actual cuts into year end, faded quickly. Markets are right to not price away further cuts. Not unless housing stirs will they need to to do so.
If that unlikely outcome happens, it’ll be hikes in short order.
