Fin-X Rapid Response - Yesterday's data dramatically shifted RBA rate expectations
Coming after Wednesday's sticky inflation readings, RBA rate expectations have shifted dramatically in response to today's hot household spending and private capex figures. The risks are building that more than one more rate increase this cycle may be required.
Australian household spending rose by +1.1% in July and +7.0% over the last year on a seasonally adjusted basis, much stronger than the anticipated +0.3% mom and +5.7% yoy consensus forecasts.
June spending was also revised +0.2% higher to +1.0%
The trend spending estimates rose +0.6% for the month and +6.2% through the year.
All nine spending categories rose in July. The largest increases were clothing and footwear (+1.6%), recreation and culture (+1.5%) and miscellaneous goods and services (+1.3%).
Annual spending on goods rose +7.2% yoy, while spending on services rose by +6.8% yoy.
Discretionary spending rose +7.8% yoy and non-discretionary spending rose +5.6% yoy.
Tom Lay, ABS head of business statistics, said: “This was the third consecutive monthly rise in household spending [...] Spending on gambling activities, major sporting events and cinema attendance all contributed to the rise this month. Households [also] spent more on pharmaceuticals, general healthcare services, eye care, and dental treatment in July."
Total private new capex fell -3.6% in the June quarter (seasonally adjusted, chain volume measures), but remained +10.7% higher than the same time last year.
Equipment and machinery investment fell -8.9%, driven by an -11.3% fall in non-mining equipment
Tom Lay said: “June’s fall in investment was the result of a -53.0% in spending on information media and telecommunications equipment, after record investment in server racks and processing equipment for data centres saw an increase of +199.6% last quarter. Despite the quarterly fall, total capital expenditure remains +10.7% higher than the same time last year.”
“Buildings and structures investment rose +2.1%, driven by continued activity on data centre construction to expand capacity, as well as commencement of new renewable energy projects this quarter.”
Non-mining investment rose by +3.3% while mining investment remained comparatively lacklustre at -0.1% during the quarter.
S&P/ASX200 9,038 -0.98%, AUDUSD 0.7180 +0.14%, Aus 2yr 4.69% +7bps, Aus 10yr 5.09% +6bps
Fin-X Capital Group View
Today's data was very disappointing for anyone hoping that the RBA wouldn't raise rates again.
The capital expenditure figures confirm what was already known - investment in data centres is in a strong uptrend - while the household spending data is more surprising.
The level and breadth of the increase are both significant. In contrast to yesterday's CPI data, the acceleration in discretionary spending suggests that household budgets are no longer being squeezed by price increases in non-discretionary areas.
It seems that a high proportion of the July increase in wage awards is being spent immediately. The key question for rates is whether the higher consumption will be sustained.
The next spending and CPI figures are out on the day of and the day after the September RBA meeting, respectively. The market is pricing a 40% chance of a September rate rise and an 80% chance of an increase on or before Melbourne Cup Day when the next quarterly forecasts are produced.
Interestingly, the market only expects 1.3 quarter-point increases in total by the end of March, with rate cuts resuming later next year. That outlook seems somewhat inconsistent with the RBA view that the economy is operating above capacity. If the views were aligned, the market would be looking for three or four rate increases.
This week we've seen upside surprises on spending, investment, and inflation. Taken together, they certainly point to strengthening demand. The slight uptick in unemployment is the one data point that stands in the way of an immediate rate rise. If there is renewed strength in the labour market and spending proves resilient, further rate rises are likely, even if house prices fall.
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