Australia’s Weak Sentiment, Wage Growth Spur Rate Bets: Economy

Australia’s Weak Sentiment, Wage Growth Spur Rate Bets
Pedestrians cross an intersection during the morning rush hour in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

Australian consumer confidence hovered near the weakest level this year and wage growth slowed, underpinning bets the central bank will cut interest rates next month to the lowest level in more than two years.

The sentiment index for May rose 0.8 percent to 95.3, a Westpac Banking Corp. and Melbourne Institute survey taken May 7-11 of 1,200 consumers showed today in Sydney. The wage price index, which measures hourly pay rates excluding bonuses, advanced 0.9 percent last quarter from the previous three months, when it rose 1 percent, the statistics bureau said.

Australian stocks fell and the local dollar touched the lowest level this year as concern mounts Greece will be forced out of the euro area, prompting investors to increase wagers the Reserve Bank of Australia will lower rates at its June 5 meeting. Governor Glenn Stevens cut the benchmark by half a percentage point this month after quarter-point reductions in November and December as the economy struggled to gain traction, inflation slowed, house prices fell and consumers saved more.

“We expect households will continue to be cautious and that backs our call the RBA will follow up with a 25 basis-point cut in June,” said Celeste Tay, a Singapore-based economist at 4cast Ltd. “Wages outside the mining industry showed a softening in the quarterly growth pulse.”

Consumer confidence stagnated as concern about the global economy and higher mortgages costs countered the central bank’s deepest rate cut in three years and government cash handouts.

Mortgage Relief

Mortgage rates fell by an average 37 basis points after the RBA this month slashed the overnight cash rate target by half a percentage point to a two-year low of 3.75 percent, Westpac said. Almost 90 percent of Australian mortgages have variable rates.

In minutes of its May 1 meeting released yesterday, the RBA explained that it lowered the benchmark by 50 basis points instead of the more widely forecast 25 points to ensure consumers borrowed at an “appropriate” level.

The consumer sentiment results were “disappointing,” given they came after the rate cut and a May 10 report showing falling unemployment, Bill Evans, Westpac’s chief economist, said in a statement. “Increasingly disturbing news around Europe and specifically Greece is likely to have unnerved households.”

Greece will hold new elections as President Karolos Papoulias failed to form a coalition following an inconclusive May 6 vote, threatening pledged spending cuts required to secure 240 billion euros ($306 billion) in bailouts.

Stocks Slide

The MSCI Asia Pacific Index dropped 2.1 percent to 114.75 at 12:31 p.m. in Tokyo, the sixth straight session of declines that matched the longest skid of the year. In Australia, the S&P/ASX 200 Index dropped as much as 2.1 percent, touching the lowest level since March 9.

While Australian monetary policy is loosened, fiscal policy is tightening. Prime Minister Julia Gillard’s government unveiled a budget on May 8 that aims to return to surplus next year and scrapped a planned cut in company taxes to fund payouts for low-and middle-income earners.

The reaction to the budget was “disappointing, with only 9.9 percent of respondents indicating that the budget would ‘improve’ family finances, while 36 percent indicated the budget would ‘worsen’ family finances,” Evans said.

Gillard said in an interview after the budget that a return to surplus gives the central bank “maximum room” to adjust rates if needed and ease pressure on manufacturers that have been hobbled by currency gains.

Rate-Cut Betting

Traders are pricing in a 90 percent chance of a quarter-point cut to 3.5 percent at the RBA’s meeting next month, swaps data compiled by Bloomberg show.

Even after the RBA’s latest rate reduction, Australia has the highest benchmark borrowing cost among major developed economies. Policy rates are near zero in the U.S. and Japan, 1 percent in the euro area and Canada, and a record-low 2.5 percent in neighboring New Zealand.

In his statement, Evans said “there is ample scope for further rate cuts” at one of the next two meetings. Last year Evans was the first economist to predict the RBA’s 100 basis points of rate reductions.

Three RBA rate cuts in seven months have weighed on the local currency, which soared to a post-1983 floating record of $1.1081 in July. The so-called Aussie has declined about 10 percent since then and this week fell below parity with the U.S. dollar for the first time this year.

Aussie’s Decline

Earlier today the Australian dollar traded as low as 99.17 U.S. cents, the weakest since Dec. 20.

Australia’s unemployment rate fell last month to 4.9 percent, the lowest level since April 2011, from 5.2 percent in March, a government report showed last week.

South Korea’s unemployment rate held at a two-month low of 3.4 percent in April, the government said today, matching the median estimate in a Bloomberg News survey of 12 economists. The number of employed people increased 1.9 percent to 24.76 million last month from a year earlier.

Japan’s machinery orders fell less than economists forecast in March, as earthquake reconstruction helped support the nation’s growth. Bookings decreased 2.8 percent from the previous month, when they rose by the same amount, a report showed today. The median estimate of 29 economists surveyed by Bloomberg News was for a 3.5 percent decline. Orders can swing between gains and declines depending on the timing of major projects.

EU Inflation

In Europe, inflation probably slowed to an eight-month low of 2.6 percent in April from a year earlier, according to a Bloomberg News survey before a report due today.

U.K. unemployment probably rose to match a 16-year high in the first quarter, adding pressure on Bank of England Governor Mervyn King as he prepares to explain why policy makers stopped expanding stimulus for the economy last week.

The jobless rate increased to 8.4 percent, according to the median forecast of 27 economists in a Bloomberg News survey. King will speak at a press briefing on the Bank of England’s new economic forecasts and its May 10 decision to halt quantitative easing.

In the U.S., housing starts likely rebounded from a five-month low in April, economists surveyed by Bloomberg News predicted. Building permits probably fell in the same period, another survey showed.

Australia’s economy is being powered by demand for energy and minerals located in the nation’s north and west from emerging countries including India and China, driving a more than 30 percent rise in the local currency in the past three years. That’s put pressure on non-resource industries such as manufacturing and tourism in the most-populous states of New South Wales and Victoria.

An Australian Bureau of Statistics report today showed hourly rates of pay at mining companies increased 4.6 percent from a year earlier, the biggest gain among the 18 industries surveyed, and construction pay gained 4.2 percent. Retail and health-care workers’ income advanced by the least, each at 3 percent, it showed.

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