Two sets of data released this week have analysts increasingly wary about the prospects for further interest rate cuts, with any move at the next meeting of the Reserve Bank of Australia in December seen as very unlikely, while some believe the rate-cutting cycle is now over.
Early in the week, we saw the release of the long-running Westpac-Melbourne Institute Consumer Sentiment Index, which tracks the confidence of consumers, and which swung heavily to be back in positive territory for the first time since 2022.
Westpac's head of Australian macro-forecasting, Matthew Hassan, said the numbers were a shock.
As he said in the report:
This is an extraordinary and somewhat surprising result. November marks the first 'net positive' read on consumer sentiment in the best part of four years. This is the first time this has happened since February 2022. Indeed, excluding the Covid disruptions in 2020 and 2021, this is the most positive result in seven years.
Mr Hassan said while sentiment overall was still only marginally positive, "the move draws a clearer line under what had been an extended period of consumer pessimism when disposable incomes were being hit hard by a combination of high inflation, high interest rates and rising tax payments''.
Mr Hassan said the positive sentiment showed clearer signs that a recovery is taking place, with trade tensions between the US and China de-escalating, and consumer demand and housing markets stronger.
On the actual numbers, the Consumer Sentiment Index increased 12.8% to 103.8, where 100 is a neutral setting.
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Job market stronger
These positive numbers were followed by a surprise fall in unemployment numbers, which were released by the Australian Bureau of Statistics (ABS) on Thursday.
The ABS said the seasonally adjusted unemployment rate fell to 4.3% in October, down from 4.5% the previous month.
RBC Capital Markets analysts said the strong numbers had their team not only recalculating their interest rate outlook but also moving to rule out any further cuts.
As they said in a note to clients:
Labour force data remain choppy from month to month but the underlying trends continue to confirm a firm labour market by historic standards, erring a little tight amid an economy with little if any spare capacity. The unexpected strength in October labour force including the details will keep the RBA sidelined and suggests that policy settings that are modestly restrictive are both appropriate and prudent. We think this RBA easing cycle is over and expect the RBA to sit on the sidelines for the foreseeable future.
Still a chance of a rate cut
AMP Ltd (ASX: AMP) economist My Bui was more hopeful of a rate cut, while being mindful that the bar was set "very high" for any more cuts.
As she wrote:
We do see room for one more cut, as our base case is for the unemployment rate to increase to 4.6% (which is still a very small pickup from the current level), and quarterly trimmed mean inflation to head back to around 0.7% quarter on quarter from the currently elevated pace of 1% quarter on quarter. But any better-than-expected data on either front would mean an extended holding pattern from the Reserve Bank.
The RBA board, which next meets to deliberate on interest rates on December 9, has cut official interest rates three times this year, the most recent cut coming in August, which lowered the official rate to 3.6%.
