Via Damien Boey at Credit Suisse:
Consumer confidence came in well below expectations, falling to a 2-year low of 96.5 in early July from 100.7. Historically, levels below 100 are supposed to be consistent with weakness in per capita spending. Confidence has not bounced after the election or multiple rate cuts. Quite the opposite in fact.
Why might consumers be so downbeat? We can think of a few reasons:
- Tax cuts are not all they are cracked up to be. On paper, LNP tax cuts are supposed to total $7.1 billion. But not all of the tax cuts are new. Indeed, only half of the $7.1 billion is new. And then there is bracket creep to consider over the past year, which could be worth $2-3 billion. The net stimulus is arguably quite small.
- Job losses. Our proprietary labour market indicator has been pointing to rising unemployment for some time. Perhaps we are now starting to see weak demand filter through to the broader labour market. Job losses do not have to be particularly large in magnitude to cause over-leveraged households to worry about their financial security and restrain spending.
- Payment shocks from interest-only mortgages resetting to principal plus interest terms. We doubt that the incremental effect of resets is that large in isolation – but payment shocks are another straw that could break the camel’s back.
The good news is that although consumer confidence is down, housing sentiment is up, especially in the key states of NSW and VIC. Lower rates, improved affordability and relaxed lending standards are helping marginal buyers to enter the market.
Updating our proprietary domestic demand tracker for the latest data, we find that the indicator has fallen a little further into contraction territory, because of the large downside surprise to consumer confidence. We expect 2Q and 3Q GDP growth to be quite soft, but for growth contributions from net exports, inventory build and possibly mining capex. The RBA will have to downgrade its growth forecasts even further. But perhaps it already had downgrades in mind before it cut rates twice this year, and simply did not confess to them (preferring instead the narrative that the supply side of the economy has grown even more rapidly than first thought).
Interestingly, our proprietary model of the real yield curve, based on the RBA Taylor rule, USD availability in offshore markets, the NAB business confidence-conditions spread and home-buying sentiment has improved in recent times to levels consistent with a return to a positive slope. Our curve model is suggesting that the RBA has already done enough to inspire greater confidence in the economy longer-term, even as it dwindles in the here and now. Should actual curve pricing follow our model (as it historically has done), we would expect cyclical value stocks to outperform within the equity market.