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Cliff Notes: Sentiment’s Many Facets

Key insights from the week that was.

Sentiment has been at the heart of the action this week, both in Australia and abroad.

With confidence and conditions having fallen sharply in the December reading, the January edition of the NAB business survey was eagerly anticipated. While the survey did show a bounce in conditions and confidence in the month, conditions only came back in line with its long-run average and confidence remained below. Key to the outlook for the economy: the employment index was broadly unchanged in January (+1pt) having fallen over 5pts in December – indicating a moderation in employment growth in 2019; while CAPEX (investment) expectations fell to a three-year low. If we continue to see broad-based weakness in conditions across the consumer sector and business services, then both employment and investment are at risk of coming under further pressure.

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From the consumer’s perspective, February brought a reversal of fortunes, with the Westpac-MI Index of Consumer Sentiment back into ‘cautiously optimistic’ territory having printed a pessimistic read in January for the first time since late-2017. The survey was in the field last week, at the same time the RBA shifted to a balanced view on interest rates. Consumers look to have responded to that change, with the number of respondents expecting rates to rise over the next 12 months falling to its lowest reading since August 2016 – the last time the RBA cut the cash rate. Lower petrol prices and the continued rise in global equity markets from their December lows were additional positives, and arguably are key reasons why households’ views on the economy remain well above average – in addition to the low unemployment rate.

In contrast, views on family finances continue to hold headline sentiment down, being only in line with their long-run average rather than materially above. Finance and wealth expectations face stiff headwinds, not only from still-weak wages growth but also broadening house price declines. In February, our index of House Price Expectations fell another 8% to a new record low back to the start of the survey sample in 2009. Over half of respondents in NSW and Victoria expect further price declines over the coming year. This entrenched weakness now looks to be spilling over to the other states, particularly Queensland and WA. It is unsurprising then that new lending data is so weak, across both investors and increasingly owner occupiers, as households bide their time.

Moving offshore, in New Zealand the RBNZ met for the first time in 2019. Like the RBA the week before, they also took a more cautious view of the outlook, with the cash rate unchanged “through 2020” and the next move potentially “up or down”. This dovish shift came more as a result of international risks than concerns over the domestic economy. On the latter though, our NZ team and the market believe there is justification for a further dovish tilt. This is because of last week’s weak labour market data as well as downward revisions to immigration, both of which have not been incorporated into the RBNZ’s current view. Westpac sees the RBNZ on hold through 2021.

Turning then to the US, it has generally been a positive week. As we go to print, a deal preventing another near-term shutdown is about to be finalised. And, although a compromise is still a long way off, trade negotiations between the US and China are continuing, and there seems a willingness on both sides to allow further time past the current March 1 deadline – if needed. As a result, the market remains sanguine on US’ risks, with both US equities and the US dollar higher over the week.

The one counterpoint to this optimism came from core retail sales reportedly falling 1.7% in December – the weakest read since 2001. Albeit coincident to December’s sharp equity decline, this result is contrary to the strength of the labour market and hence is probably, at least in part noise. It will hit Q4 GDP and keep market expectations over growth and policy subdued near-term, but the weakness in sales is unlikely to persist.

Finally, the second estimate of Euro Area Q4 GDP of 0.2% growth indicates a subdued end to 2018. Consensus expectations are still for the Euro Area to grow around trend at 1.5%yr in 2019, but, given high geopolitical uncertainty, the confidence band around this point estimate is naturally wide. While Westpac’s forecast for 2019 was only slightly lowered to 1.4% at the start of this year, from 1.6% at March 2018, we have still been surprised by the recent data.

Of particular concern was Wednesday’s industrial production data showing a 2.5% fall in Q4 equating to a 3.9% decline through 2018. Against this, over 2018, the unemployment rate declined to 7.9% from 8.6% as growth in employment outpaced that of the labour force four to one (1.0%yr versus 0.25%yr). Here there are two take-outs: a) the rate of employment growth needed to see a lower unemployment rate isn’t that high and b) lower GDP growth than in the past is largely structural.

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