Wednesday, September 21, 2011

Westpac - Next move from the RBA will be down

Except from Westpac Consumer Sentiment Survey

The September Westpac–Melbourne Institute Consumer Sentiment Survey was a mixed bag. Headline sentiment posted a solid rise, mainly driven, we suspect, by a more relaxed outlook for interest rates. Responses to the various ‘time to buy’ questions were also perkier, particularly for housing.

However sentiment remains in firmly pessimistic territory overall and aversion to risk is still intense.

Meanwhile a sharp deterioration in unemployment expectations lends more weight to the view that consumer demand is entering a cyclical weakening. Indeed, the worsening picture on job security effectively negates the good news from improved sentiment.

Not only does it suggest actual labour market conditions are deteriorating, it also points to a material downturn in discretionary spending and is an additional negative for already soft housing markets where job loss concerns inhibit demand.

For now we have made only minor changes to our consumer forecasts, mainly to incorporate stronger than expected Jun quarter spending estimates from the national accounts and partial data for Jul. These give a firmer near term picture for consumer demand but the broad forecast of a material weakening in remains intact.

Looking ahead, steady rates and a reduced threat of rate rises should continue to allay consumer fears of rate hikes. But with rising uncertainty around the global economy and growing signs of weakness in local labour markets, we suspect that steady rates on their own will not be enough to restore consumer confidence.  

We continue to expect that the next move from the RBA will be rate cuts starting with 25bps in Dec and culminating in a total reduction of 100bps by Sep 2012.

Australian consumers are likely to remain badly out of sorts at least until an easing bias is apparent and most probably until actual rate moves are enacted.

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