Will confidence affect central bank policy?

Yesterday’s consumer confidence numbers show how fickle sentiment is; for the first time in a year there are slightly more optimists than pessimists in Australia.

Source: Bloomberg

The dual effect of the oil price slide (the price at the bowser) and the first interest rate cut from the RBA in 18 months has seen confidence cross 100 for the first time since January 2014. It’s also the first positive move since the release of last year’s federal budget, the impact of which saw confidence falling over 6 points – it has never truly recovered.

What was also interesting from yesterday’s local data was housing finance. Housing approvals for owner-occupiers rose 3.5% in December, having flatlined for most of 2014. The annual growth rate in owner-occupiers subsequently jumped 4.1%.  The movement in housing finance was very broad-based. New construction added 0.7% month-on-month for an annual rate of 7.9% and the value of approvals for investors rose 3.5% month-on-month to an annual rate of 16.1%. These are really solid growth figures and the reason why there is concern around housing overheating.

Like the previous month, the Australian Bureau of Statistics is cautioning that the results may actually be sub-actuals. The ABS believes banks are not necessarily reporting first home owners if they do not receive the first home owners’ grant. Considering the medium house price in Melbourne ($669,000) or Sydney ($1,005,000) is well above the cut-off point of the new owners’ grant, under reporting is highly likely.

From a strategic perspective, the results from yesterday’s housing and consumer confidence numbers may give policy makers a reason to pause on a March cut. The macro evidence from yesterday is only tentative and does not give a complete view. However, the positive impact of the rate cut and the latent effect of petrol prices may be just enough to hold rates where they are – for now. The interbank market saw the probably of a March rate cut falling to just 20% – this may see a slight unwind in the yield trade.

With ASX 200 net dividend yield falling to 4.5% compared to its historical average of 4.86% in this time – a full standard deviation away from the mean – Aussie Government bonds are near record lows. An easing in the outlook for rates would likely settle the heat in the bond market and would see funds filtering out of the equity market.  

However, the counter to this argument is today’s employment release. Expectations are for the employment change to slide after last month’s surprise jump adding 5,000 jobs while the unemployment rate is expected to rise 0.1% to 6.2%. Employment security is currently a major concern for most Australians and wage inflation remains stagnant. Will that be enough to ward of the grass roots confidence change?

Ahead of the open, we are calling the ASX up 20 points to 57.

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