Economic readings in the US and Australia surprised mostly on the downside of market expectations, but several special factors were in play during the capture period for the data which raise doubt about whether the softer data mark a weaker turn in either economy. We believe that the US Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) will both be relatively cautious interpreting the recent data for monetary policy setting purposes. The Fed is unlikely to expand its security buying program (quantitative easing) beyond what it is already doing, while the RBA is unlikely to cut its 3.00% cash rate any further this cycle, although it is likely to retain the easing bias language in its monthly policy meeting statements well into the second half of 2013.
Soft US economic readings over the past week included March retail sales (-0.4% m-o-m; consensus market forecast, 0.0%) and April University of Michigan consumer sentiment (72.3; consensus, 79.0 and down from 78.6 in March). In the case of retail sales, the late and severe winter storms in March as well as seasonal adjustment issues associated with the early Easter may both have played a part in the soft result. It is also possible that weak retail sales reading may relate to a delayed response by households to the rise in payroll tax back in January. Effectively, the jury is out until more retail sales readings are available to either confirm or deny the soft March result.
The preliminary April consumer sentiment reading does not assist in interpreting the March retail data, mostly because the two readings of the consumer sentiment survey each month have been showing weak early month preliminary readings often followed by much stronger final late month readings. In short, the late April consumer sentiment reading, due in a fortnight, will be needed to assess whether sentiment has taken a softer turn this month.
Turning to the Australian data releases, both the April Westpac-Melbourne Institute consumer sentiment survey (-5.1% m-o-m, after increasing by respectively 2.0% and 7.7% in March and February) and the March labour force report (employment, -36,100; consensus, -5,000 with the unemployment rate rising from 5.4% to 5.6%; consensus, 5.4%) were weaker than expected. Consumer sentiment may have been adversely affected by negative news events such as the bail-out crisis flaring in Cyprus during the survey period as well as the worsening situation on the Korean peninsula. The big movements in the labour force report in February (an upwardly revised 74,000 lift in employment, the biggest monthly increase in 13 years) and March (the biggest monthly employment fall in 10 years) point to seasonal adjustment issues associated with the early Easter as well as the leap year influence in February 2012.
More data will be needed to make sense of both the ups and downs of the monthly consumer sentiment survey as well as the quite extreme volatility in employment readings in February and March. Our view is that the recovery in housing activity may provide the key which on the basis of weekend auction clearance rates appears to have continued almost unabated since late February. Housing recovery will, in our view, underpin recovery in retail spending and employment. Several more months of data will be needed to prove whether our contention is correct. During that time, it is valid for the RBA to maintain an easing policy bias, but just as we cannot yet prove that economic activity is quickening, neither can the RBA prove that economic activity is starting to slip. The cash rate may be stuck at 3.00% for quite some time.