Red Book underlines rate cuts

Fresh from Westpac’s September Red Book:

― The Westpac–Melbourne Institute Consumer Sentiment Index fell 5.6% to 93.9 in Sep from 99.5 in Aug.

― Sentiment was knocked lower by renewed financial market turmoil and concerns about the economic outlook. Responses to additional questions on news recall show negative assessments across all topics and particularly high recall of news on ‘international conditions’.

― Updates on the ‘wisest place for savings’ question suggest consumer caution eased slightly between Jun and Sep. Although a high proportion still favour ‘bank deposits’ (27%) and paying down debt (17%), ‘real estate’ is becoming increasingly favoured (28%, the highest proportion since Sep 2003).

― The mix shows through as a modest decline in the Westpac Risk Aversion Index from 21.7 in Jun, to 19 in Sep, well down on the 36.6 read in Dec 2014.

― Our CSI± measure – a modified sentiment indicator that we favour as a guide to actual spending – fell 5.6% in Sep to be back at its Jul level and a touch below that in Jun. The index is pointing to, at best, weak-to-flat per capita spending growth over H2 2015 H2 and early 2016.

― The sub-index on ‘time to buy a major item’ recorded a particularly sharp 13.5% fall in Sep. Some of this likely refl ects the declining AUD and associated loss of purchasing power, rather than a drop in spending intentions. Latest actual data on durables spending continues to show solid growth momentum.

― Confidence around the housing market continued to erode in Sep. The ‘time to buy a dwelling’ index slipped 0.9% to be down 8.6%yr and 30% below its Sep 2013 peak. Buyer sentiment is slumping heavily in NSW, hitting its lowest level since Jun 1989. Readings are more resilient in Vic and strongly positive in Qld and WA.

― House price expectations are showing further signs of waning. The Westpac Melbourne Institute House Price Expectations Index fell 6.1% to 127.3 in Sep – down 17%yr but still above the 100 level and slightly above the index’s long run average of 126. The Sep fall was concentrated in NSW where price expectations had previously been very strong.

― Labour market concerns flared up again in Sep. The Westpac-Melbourne Institute Unemployment Expectations Index rose 5.8% to 156.3, the highest read since Dec. This proxy for consumers’ job-loss fears remains elevated. Actual labour market outcomes continue to perform better than implied by consumer expectations although labour incomes remain a notable weak spot.

So, a pretty confused picture but one that shows a lot more weakening trends than strengthening. Of particular note are the falls in time to buy a major household item and time to buy a Sydney property, as well as the unprecedented gap between a muted labour market recovery and recessionary levels of job security.

This is not a happy consumer. International conditions have hardly been dire, local conditions have been better, yet asset market expectations look quite worried.

As a forecasting tool I put it you that the study suggests that Sydney property is about decelerate sharply and consumer spending is about to take a decent hit.

We may or may not see a rate cut by year end but as property and the consumer slow in an environment of falling business investment, you can be quite sure than more are coming.

That Westpac can’t see this itself is interesting. It’s seems to have caught a case of futureboom, perhaps best captured by this chart:

How on earth are labour incomes going to take off as the terms of trade keep falling, productivity remains at zero and the labour market remains loose?