Daily Commentary BY THE CURVE TEAM –

Confidence Soars, RBA Strengthens Forward Guidance

15th of October, 2020

Consumer confidence surged in October and it was down to one big factor.

The latest consumer sentiment survey from Westpac saw a surge in the overall level of confidence to take the index up 32% for the past two months. The latest jump was almost entirely driven by the budget update from the government.

When the survey follows a budget update, a question on how consumers think the budget will effect them is added into the question list. Historically on balance, the budget usually has a negative impact. However, in October, the net balance was positive for the first time since the question was first introduced in 2010.

This is a great outcome as confidence is the key ingredient required to help spur a sustainable recovery from the pandemic over the months ahead.

Some caution over the exuberance in the survey should be shown with a significant gap in the level of confidence between the two main confidence survey’s opening up. Hopefully we see a similar development in the weekly survey over the coming weeks.

On the back of yesterday’s confidence numbers, Governor Lowe delivered a speech on the economic recovery this morning. He highlighted how it is expected to be uneven and some of the factors that would determine the speed and strength of the recovery.

One of the key elements that will determine the shape of the recovery according to Lowe is “how willing people and businesses are to draw on their accumulated financial buffers to spend and invest over the months ahead”

That will come down to confidence and yesterday’s survey was a good move in the right direction.

On the scope for further policy easing, Lowe said that the RBA was still discussing how further easing  could help support the recovery. They highlighted three key issues that form part of their discussions that include:

  1. how much traction any further monetary easing might get in terms of better economic outcomes
  2. the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability
  3. what is happening internationally with monetary policy

Lowe’s tone from the speech suggested there was little urgency to deliver further easing and that the timing for further easing may be better at a later phase of the recovery.

He did give more concrete forward guidance on when rates might rise.

Rather than look at the forecasts for inflation, more weight would be applied to actual outcomes. Inflation will now need to be solidly in the target band, not expected to move up sustainably into the target band. This is a significant shift.

On the other element of their mandate “we want to see more than just “progress towards full employment’”. The RBA wants to “see a return to labour market conditions that are consistent with inflation being sustainably within the 2 to 3 per cent target range.”

The big news will continue today with the latest unemployment data set  released. It is expected to show a dip in employment following the strong bounce last month. 40 000 jobs are expected to be lost, which will push the unemployment rate up from 6.8% to 7%.

The data will be the final month before the JobKeeper amendments kick in. Eligibility for JobKeeper payments from October onwards is far more stringent, with businesses needing to demonstrate a loss of revenue over the September quarter, rather than a single month as was the case for the initial JobKeeper rules.

When the economy was locked down at the beginning of Covid-19, many businesses were eligible for the payments. As the economy has re-opened, revenues have recovered drastically, meaning many people will drop off the wage subsidies, meaning unemployment will ensue.

David Flanagan

Head of Money Markets