The budget is a great big political beast, and putting the political issues to one side and looking at the budget from a purely market perspective, the ASX as a whole is likely to be breathing easier this morning.
The pre-budget noise was always going to be that - noise; the budget handed down overnight certainly wasn’t as hard or as drastic as the pre-budget leak suggested. Some economists feared this budget would put a fiscal drag on to the economy of up to 0.69% of GDP. This hasn’t eventuated with current modelling, seeing only a 0.3% drag. However, that’s not to say it won’t cut into growth over the coming budgets as the coalition looks to return to surplus.
The interesting changes that came in last night’s budget from a purely market perspective are the economic projections and assumption changes.
Growth forecast are, in a word, measured and unemployment forecasts could be considered high to a point of excess. Expectations are that unemployment is set to rise to 6.25% over the coming forward estimates, which seems overdone considering the unemployment cycle looks to have peaked in January to February this year. Politically an unemployment rate that holds below 6.25% is a double positive for the government; ‘more jobs’ and therefore more government revenue.
The other assumptions for the market to digest are the changes in expectations around commodity prices, which have shortened dramatically. Average iron ore prices have come into US$93 a tonne from US$100 a tonne in FY15; again from a market perspective this is harder than previously estimated. Earning expectations on raw resource, financial services and consumer discretionary plays have also tightened in FY15 to a point of turning negative. All this should have one fairly obvious binary outcome - AUD/USD is going back to the 80 cent handle.
Yet that was not the case; the AUD strengthened against all major pairs overnight, which shows one very clear point: the budget is a non-event from the market perspective, the RBA is still in play here as the budget isn’t as tough or as market intrusive as expected which was factored into positioning.
Considering commodities expectations are low, and unemployment expectations are high, if neither eventuates monetary policy will be the one to move next. This puts an AUD upside bias as predictions around a rate rise at the end of CY14, start of CY15 are well and truly intact from what was released last night.
Ahead of the Australian Open
We are currently calling the Aussie market down 27 points to 5475 on the 10:00am bell (AEST) as NAB, Westpac, Macquarie and BT Financial all turn ex-dividend, which will take an estimated 22.9 points out of the market on the open.
The budget effect, if there is one to be seen, will come in the health space; primary health care derives 90% of its earnings from government spending. With changes to the Medicare levy this is going to hit the bottom line. The same can be said for Sonic Healthcare as the $7 co-payment is unlikely to offset the $5 reduction in assistance to the services it provides. Consumer discretionary stocks are likely to be bypassed as the budget is unlikely to overtly hit spending.