Discretionary spending surged in Australia

Discretionary spending surged in Australia post-RBA rate hikes

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Australian retail sales values unexpectedly spiked 1.2%m/m in January (J.P. Morgan: flat, consensus +0.5%), the second fastest monthly growth rate since March 2009, after falling 0.9% in December (revised down from -0.7%). The surge in spending came despite the three straight quarter-point rate hikes delivered by the RBA in the final quarter of last year and the decision by most of the Aussie commercial banks to out-hike the RBA.

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The solid retail data was released during today’s RBA Board meeting; it will provide Board members with new evidence that Aussie consumers are holding up surprisingly well in the wake of the tightening already delivered. At the last Board meeting in February, when the RBA surprised by leaving the cash rate unchanged, Board members signaled their uncertainty about how households were coping.

The remarkably strong retail result, which stemmed largely from a bounce in discretionary spending (+0.7%m/m), had a limited market impact, however. Market pricing continues to suggest a 68% chance that the RBA will announce a 25bp hike to the cash rate at 2.30pm today. Our call is for the cash rate to remain unchanged although, as highlighted in previous commentary, our level of conviction is low. The case for a hike is convincing, but it was strong last month when the RBA bucked unanimous expectations for a hike.

The bigger question is: will the strength in the Aussie household sector continue? Anecdotal evidence suggests that consumers are taking a more conservative approach to spending, mainly owing to expectations of further rate hikes down the track. Expectations of higher market interest rates were the main reason behind the considerable drop in consumer confidence last month. According to the Westpac-Melbourne Institute, 93% of those surveyed in February expected the cash rate to rise over the next 12 months, with over 60% expecting the increase to be more than 1%.

We suspect that retail spending will be patchy near-term. Not only will interest rates continue to rise (we forecast cash rate of 5% by year-end), but recent increases in petrol prices and recent falls in the local equity market will curb spending in coming months. Further down the track, however, business investment looks set to emerge as a powerful driver of economic growth in the latter six months of the year, which has clear positive implications for employment growth, and therefore wages and spending.

As touched on previously, discretionary spending was firm in January, with department store sales the main driver, rising 7.2%m/m. Solid gains were also reported in food and clothing sales, which were up 1.3% and 2.9%, respectively, over the month. The only fall recorded in the major components of the retail sales index was in sales at cafe and restaurants, down 3.1%m/m, though this was largely a payback from the solid gain in December.

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ENDS