Plunge in Aussie retail sales to sideline RBA

Plunge in Aussie retail sales to keep RBA sidelined next week

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The last domestic economic releases ahead of the RBA’s April Board meeting today offered material surprises that support our central view that the next 25bp rate hike will be delayed until May. The retail numbers shocked on the downside, as did building approvals, though the credit data fell in line with market expectations.

We have highlighted in previous commentary that correctly predicting the outcome of monthly Board meetings, effectively, is a coin toss and that policy decisions would depend largely on the data released in the intermittent four week period. In our view, therefore, today’s numbers make the a further rate hike next week less likely; market pricing still suggests a 64% chance of a 25bp move (down from 70% prior to the data releases).

Retail sales values tumbled 1.4%m/m in February (J.P. Morgan: 0.2%, consensus: 0.3%). This may be viewed as a payback for the solid 1.1%m/m advance in the previous month, but suggests also that the rate hikes already delivered by the RBA, combined with the decision of most of the Aussie commercial banks to out-hike the RBA, are weighing on consumer spending. Also, it seems the outlook for further rises in interest rates is encouraging consumers to be more restrained in their spending habits. Assuming the RBA continues to tighten policy (we expect the cash rate to be at 5% by year-end), interest rate burdens will soon be at pre-crisis levels, squeezing households’ disposable income even further.

Discretionary spending fell 0.8%m/m, marking the biggest fall since July 2009. This was due to sharply lower sales at department stores (-3.9%) and for household goods (-1.3%), while spending at cafes and restaurants was up (+1.8%). Looking at the non-discretionary areas of spending, food sales fell 1.7% over the month and clothing sales tanked 3.9%. Other retailing fell 0.8%m/m in February.

The credit aggregates showed a 0.4%m/m increase (J.P. Morgan: 0.2%, consensus: 0.4%) in the pool of credit outstanding in the economy in February, the same rate as in the previous month. We had expected a moderation in credit growth owing to an easing in housing credit. This failed to come to fruition despite market interest rates having increased, the government’s expanded first home owners’ grant having expired on December 31, and that caps on the original grant of A$7,000 were introduced from January 1. Housing credit growth remained steady at 0.7% in February.

Business credit slid for the 13th straight month, falling 0.1%m/m in February. With the process of deleveraging for businesses nearing an end, though, and with domestic banks are starting to make more credit available to small- and medium-sized businesses, given the more attractive returns available from higher risk lending, this series should soon start to rise. Personal credit growth, though, remains subdued, and eased slightly in February to 0.4%m/m.

ENDS

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