Consumers still "relatively upbeat" in October after sentiment index declines

Summary: Household sentiment deteriorates slightly in October; consumers “relatively upbeat” despite NSW, Vic lockdowns; still above long-term average; little difference in largest states’ readings; three of five sub-indices lower; unemployment index lower.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again in mid-July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery.

According to the latest Westpac-Melbourne Institute survey conducted in early October, household sentiment has deteriorated slightly. Their Consumer Sentiment Index declined from September’s reading of 106.2 to 104.6.

“Despite both Sydney and Melbourne remaining in lock down throughout the last month, consumers are relatively upbeat,” said Westpac Chief Economist Bill Evans.

Any reading of the Consumer Sentiment Index above 100 indicates the number of consumers who are optimistic is greater than the number of consumers who are pessimistic. The latest figure is still above the long-term average reading of just over 101.

Domestic Treasury bond yields fell noticeably on the day, somewhat outpacing the overnight movements of their US Treasury counterparts. By the close of business, the 2-year ACGB yield had shed 3bps to 0.73%, the 10-year yield had lost 8bps to 1.66% while the 20-year yield finished 9bps lower at 2.24%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.03%, remained fairly soft. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until July 2022 and then rise to 0.43% by February 2023.

Evans noted there was “little difference in the state readings”, with the four largest states each producing a similar reading to the national reading. “Consumers in New South Wales and Victoria are clearly looking towards their states reopening as vaccine coverage reaches globally competitive rates.”

Three of the five sub-indices registered lower readings, with the “Economic conditions – next 5 years” sub-index posting the largest monthly percentage fall.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, declined from 120.5 to 107.1. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

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