From Macquarie:
Australian retailers face a more challenging Christmas trading period as the RBA cash rate remains on hold in November following mortgage rate hikes of 15bps to 20bps from the major banks in October.
RBA offset to banks not forthcoming: Out of cycle bank rate hikes were expected to be offset by RBA rate cuts in order to leave mortgage rates broadly unchanged. A weak underlying CPI reading (+0.3% QoQ, +2.2% YoY) last week increased the market implied probability of a November cut to 67%, before receding to 44% yesterday. The longer the time period between the mortgage rate hikes and the eventual RBA cut, the more likely it is for the major banks to once again retain a larger portion of the rate cut, further reducing the impact of monetary policy on the economy.
Consumer sentiment to be impacted at worst possible time for retailers: The implementation of mortgage rate hikes in late November will surprise some borrowers heading into the Christmas and January sales. This may result in a sluggish start to December trading, forcing retailers to bring forward discounting to drive volume growth, resulting in GP margin pressure, which may be most pronounced for consumer electronics retailers (JBH, DSH and HVN) as DSH promotional activity ratchets up. Note comparisons to last December will be impacted by the 15 December 2014 Sydney Siege, which drove a back-ended sales campaign.
December RBA rate cut possible if sentiment indicators register a material impact from higher mortgage rates. A December RBA rate cut may be enough to provide a more supportive backdrop to the key December and January trading period. The market is unlikely to expect a December rate cut due to lack of material data over the next month. With February the most likely RBA rate cut opportunity, the key December – January sales period is likely to experience a headwind to sales growth.
