November consumers sentiment improves; comes with some “intriguing aspects”

Summary: Household sentiment improves a touch in November; “intriguing aspects” of survey; above long-term average; three of five sub-indices higher; change in labour market expectations a “stunning development”; unemployment index lowest since mid-1990s.

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 improved a touch. Their Consumer Sentiment Index declined from September’s reading of 104.6 to 105.3.

“While the movement in the Index is hardly noteworthy, there are a number of intriguing aspects of the survey that provide us with useful evidence of how the economy is evolving as we emerge out of COVID,” 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 increased noticeably on the day with the exception of ultra-long yields which paradoxically declined moderately. By the close of business, the 2-year ACGB yield had jumped 19bps to 1.24%, the 10-year yield had gained 10bps to 1.87% while the 20-year yield finished 4bps lower at 2.30%.

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 May 2022 and then rise to 1.00% by December 2022.

Three of the five sub-indices registered higher readings, with the “Economic conditions – next 12 months” sub-index posting the largest monthly percentage gain. Readings for the sub-indices “Family finances versus a year ago” and “Family finances next 12 months both deteriorated.

Among the intriguing aspects to which Evans referred were indications consumers are generally “determined” to spend more on Christmas gifts this year while simultaneously “being cautious about over-extending.” He also noted house owners with mortgages displayed “some concern about a potential rise in rates.” However, he described the change in labour market expectations as “by far and away the most stunning development.”

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, fell from 107.1 to 95.3. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

Evans said the latest reading of this index is the lowest it has been since the mid-1990s and “at historic highs for both males and females.” He described confidence amongst females as “particularly buoyant, near all-time record levels going back to 1975.”


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