This is an updated version of a post one of the team did over at MacroBusiness earlier in the day.
Weak global markets, fears about European defaults, a weakening global economic outlook and business and consumer confidence at home that is very weak have all conspired to fundamentally change the market’s expectations about the course of interest rates in Australia.
Here are a couple of charts which show what the market is now pricing into the interest rate curve followed by a break up of some of the micro-data from the Westpac consumer sentiment survey which highlights the risk to the domestic economy from further household retrenchment.
OIS are “overnight Index Swaps” they are used by traders and the major players in the Australian interest rate markets to bet on the direction of the RBA over the next 12 months. As you can see a month ago the market was pricing flat cash and then an up move now it is unequivocally all about rate cuts regardless of the RBA’s central tendency. 30 day futures are similarly certain that rates are going down.
Also the physical curve in the short end (bank bills – traded by the majors and fund managers) is starting to roll over with 4, 5 and 6 month BBSW dropping below the 3 month rate indicating that there could be more to it than just the offshore panic which is driving futures markets:
As regular readers know we put a lot of stock into the NAB Business Survey and the Westpac – MI Consumer Confidence surveys and these have been telling us for a long time that the economy was in worse shape than the Macro settings in the economy or the mining boom suggested.
So here are some charts to visualize the severity of the falls in today’s consumer sentiment numbers which were down 8.3% to 92.8 and the worst outcome since May 2009.
Firstly,Confidence, Current Conditions and Expectations all fell heavily:
As did confidence in the economy both over the next year and next 5 years:
Family’s view on their own finances was already low but fell a little further:
‘Time to buy a major household item” tanked:
Confidence among Owners and Mortgage Holders slumped while confidence among Renters was up, which is no surprise given house prices are falling:
High income earners’ confidence fell the most but other groups are also weak:
Coming on top of yesterday’s negative NAB Business Survey, it is clear that confidence across the economy is heading south and it would be a brave RBA to hike in this environment, or even to cling to the aggressive rhetoric. We don’t think they will.
Overall the Consumer Confidence data is really weak and had not the RBA been so aggressive in its rhetoric a couple of months ago there would be universal calls for rate cuts. Add in a dose of uncertainty about the state of global markets and the pricing in markets doesn’t seem so outlandish.
Greg McKenna and Team.
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