Aussie July Consumer Confidence Falls -- JP Morgan

Australian consumer confidence falls marginally in July

Consumer sentiment fell marginally in July, slipping 0.6% from the previous month, although still held close to a record high. The Westpac Melbourne Institute index of consumer sentiment fell from 121.5 in June to 120.8 in July, remaining in sight of the 123.9 record high touched in May and well above a reading of 100, which indicates that the number of optimists outweighs the number of pessimists as it has done now for eight consecutive months.

Consumer confidence remains elevated thanks to a myriad of factors. Interest rates have remained on hold since November, the stock market has risen to fresh peaks in recent months, the AUD continues to hover near an 18-year high vis-à-vis the dollar, petrol pump prices have edged slightly south, the unemployment rate recently fell to a 33-year nadir, and the personal income tax cuts delivered in the Federal Budget came into play on July 1.

The component indices of the index remaining positive in July were those measuring sentiment toward past and present conditions: family finances a year ago (+0.1%); purchases of major household items (+3.2%); and current conditions (+1.9%). The forward looking components remained relatively flat or posted declines, however, reflecting the widespread view that the RBA will soon hike interest rates. Sentiment toward family finances a year ahead led the charge (-3.7%), followed closely behind by future expectations (-2.2%) and sentiment toward the economy in one years’ time (-3.0%). Meanwhile, sentiment toward the economy in five years’ time improved mildly (+0.5%).

While the underlying fundamentals buoying sentiment among consumers remain intact, growing concerns over housing affordability and a prospective rise in interest rates will prevent consumer confidence returning to record highs for the time being. JPMorgan forecasts that the RBA will increase interest rates in February 2008. Medium term inflation pressures continue to build due, in particular, to widespread drought conditions, which have pushed food, electricity and gas prices higher. As second and third round effects on inflation stemming from the drought begin to take their toll, another rate hike will likely be warranted in May 2008.

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