The household spending beat is likely to firm up market pricing for an RBA rate hike, with the acceleration in annual growth to 7.0% suggesting consumer demand is running hotter than the central bank’s forecasts had assumed. A move of this size relative to the 0.4% consensus is the kind of surprise that typically pulls forward rate expectations and lends support to the Australian dollar. That said, the same day’s private capital expenditure data complicates a purely hawkish read, with the 3.6% quarterly contraction pointing to real weakness in business investment even as households keep spending. Traders will likely weigh the two releases together rather than trading off the spending number in isolation, since a hike delivered against a backdrop of contracting business investment carries its own risks to the growth outlook.
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Australian consumers kept spending well ahead of forecasts in July, strengthening the case for an RBA rate hike even as business investment slumped.
Summary:
- Household spending rose 1.1% month on month in July, nearly triple the 0.4% consensus forecast and up from 1.0% in June.
- Annual household spending growth accelerated to 7.0%, up from 6.1% previously.
- The upside surprise reinforces market expectations that the RBA is moving toward a rate hike.
- Private capital expenditure fell 3.6% in the June quarter, against expectations for no change and a sharp reversal from the prior quarter’s 6.5% gain.
- Building capex rose 2.1% in the quarter, recovering from a 3.8% decline previously.
- Plant and machinery capex dropped 8.9%, reversing an 18.1% gain in the prior quarter.
Australian household spending rose 1.1% month on month in July, nearly triple the 0.4% pace economists had forecast, in a release that adds fresh weight to market expectations for an RBA interest rate hike.
The monthly gain accelerated from June’s already solid 1.0% reading, while annual household spending growth climbed to 7.0% from 6.1% previously. The strength of the beat, more than double the consensus estimate, points to consumer demand running well ahead of where the central bank’s own forecasts had assumed, a dynamic that tends to pull forward market pricing for tighter policy. For a central bank already weighing the timing of its next move, a consumer sector this resilient makes the case for holding off on further easing, or moving toward a hike, considerably easier to justify.
The picture on business investment told a different story. Private capital expenditure contracted 3.6% in the June quarter, a sharp miss against expectations for a flat reading and a reversal from the prior quarter’s 6.5% expansion. The breakdown showed building capital expenditure recovering to a 2.1% gain after a 3.8% decline previously, while plant and machinery spending slumped 8.9%, unwinding an 18.1% surge in the prior quarter. The divergence between a strengthening consumer and weakening business investment complicates a straightforward hawkish read on the day’s data, since a rate hike delivered while capital spending contracts carries its own risks to the medium term growth outlook.
Taken together, the releases leave the RBA weighing a household sector that is spending well ahead of forecast against a business sector pulling back on investment. Markets are likely to lean on the household spending number as the more immediate driver of rate expectations, given its direct read on inflationary pressure, while treating the capex weakness as a factor the central bank will need to monitor rather than one that derails the case for a near term hike.
This article was written by Eamonn Sheridan at investinglive.com.