Consumers are coming back
Happy consumers have all but killed any hope of a rate cut at the next meeting.
We’re going to have to wait til November now.
The RBA has made it clear that they’re willing to be patient and to be ‘data-dependent’ – which is to say we’ll worry about things when we see them.
And since the last meeting, the two key pieces of data the RBA are depending on have landed on the wrong side of the coin for rate cuts.
First up, there was the montly inflation data, which came in much hotter than expected, with the trimmed mean pace picking up to 2.7%.
That’s still in the middle of the band, but it’s moving in the wrong direction.
Most of the pick-up was due to electricity subsidies unwinding, so the RBA won’t be worried about an inflation break-out, and they won’t be wondering whether they need to actually raise rates. However, it does mean they’ll be happy to sit on their hands a while longer.
The second piece of data we got was the June Quarter GDP data last week. That also came in much strong than expected, and a couple of notches above what the RBA was forecasting just a few weeks ago.
That also does nothing to bolster the case for rate cuts.
And within the headline data, there’s an interesting story emerging – consumers are back.
Household consumption accounts for about 60% of GDP, but it’s been on the bench for several years now.
But household spending per capita grew by 0.5% in Q2, the strongest rise in three years.
This is consistent with other signs we’ve seen. Consumer confidence in the survey data has been picking up in recent months, on the back of recent rate cuts.
Goods spending is still pretty flat, but there’s been a strong rebound in services spending.
This is what the Aussie economy needs. It needs to get of public sector life support, and get back to market-driven, consumer-driven growth.
So this is all a good thing.
However, it also means that the case for rate cuts isn’t as urgent as it was just a few weeks ago.
RBA Governor was pointing to the consumption data to try to hose down rate cut expectations last week:
“We are seeing it [spending] come back, and that’s welcome”, Bullock said. “We’re seeing the private sector start to demonstrate a little bit more growth now, which I think is positive”.
“What it means for future interest rates, I don’t know. All I would say is that, if anything, it’s probably a little stronger than we thought it would be”.
“That’s good, but it does mean that it’s possible that if it keeps going, then there may not be many interest rate declines yet to come. But it all depends”, she said.
Markets followed Bullocks lead, and have effectively given up on rate cuts until November now.
The way things stand, that’s probably right.
JG.