Australian consumer sentiment posted its biggest monthly rise in 22 years in June as consumers cheered news that the country escaped a recession, lessening the need for further cuts in interest rates in coming months.
Signs of stabilisation in the global economy, rallying stock markets and a rising Australian dollar also helped drive confidence higher, with consumers growing more upbeat about their finances.
"This is a truly remarkable result," said Bill Evans, chief economist at Westpac. "(It) only strengthens the case for rates to remain on hold."
Confirming the brightening mood, government data on Wednesday showed demand for home loans rising for the seventh straight month as record low interest rates and generous government incentives saw buyers flock to the property market.
The survey of 1,200 people by the Westpac-Melbourne Institute showed its index of consumer sentiment jumped 12.7 percent to 100.1 in June, the highest level in 16 months.
The jump in confidence was the second-largest recorded increase in the index since the survey began in 1974, and comes just a day after another private sector survey showed business confidence boasting its biggest jump since 2001.
The Reserve Bank of Australia (RBA) skipped a chance to ease this month and is expected to keep rates at 3.0 percent for some time to come. It has slashed the cash rate by 450 basis points since September to spur the flagging economy, and investors expect it to remain on hold until December.
The Aussie dollar gained after the consumer sentiment data, climbing to $0.8046, from around $0.8014 beforehand. It has risen more than 25 percent since early March, amid rising risk appetite among investors.
Australian shares also rose in part on the confidence report, with supermarket operators such as Wesfarmers and Woolworths gaining over 1 percent. Speculation that Australian rates may be near their bottom pushed three-year bond futures down 0.015 points to 95.64.
Financial markets are pricing in 50 basis points of rate hikes in the coming 12 months as they bet a quick recovery, led by a turnaround in China, will probably push the central bank to reverse gears sooner rather than later to contain any inflationary pressures as the economy gathers steam again.
China is a large buyer of the country's industrial raw materials.
Westpac's Evans said the marked improvement in sentiment seemed to be linked to the release of data last week showing the Australian economy grew in the first quarter, avoiding a second consecutive quarter of contraction — the typical definition of recession.
The economy grew 0.4 percent in the first quarter, after contracting 0.6 percent in the fourth quarter of last year, helped by its best trade performance in 48 years.
The survey was conducted in the first week of June. The first-quarter data was released on June 3.
The Westpac survey showed consumers were also more upbeat on their own finances. The measure of expectations of family finances over the next 12 months rose 11.1 percent, while family finances compared to a year ago was up 8.1 percent.
UNEMPLOYMENT RISKS REMAINS
Still, there was a degree of caution with consumers wanting to improve their personal finances amid uncertainty about jobs. While the measure on whether it was a good time to buy major household items dipped, the desire to repay debt remained at record highs.
"Labour market developments will play a big role in determining how this tug-of-war plays out," said Michael Blythe, chief economist at Commonwealth Bank.
The government will release its employment report for May on Thursday. Economists expect the economy to have shed 30,000 jobs in May and the jobless rate to rise to 5.7 percent from 5.4 percent in April as companies continue to cut costs.
The government forecasts the jobless rate to top 8.5 percent by mid-2011. That will keep pressure on the central bank to maintain an easy monetary policy bias.
The soothing effect of aggressively easy monetary policy was clear in the continuing recovery in demand for housing loans.
Government data showed the number of home loans rose 0.9 percent in April from a month earlier. Government grants boosted the share of loans to first home buyers to a record 28 percent. Investors also appeared to be returning to the market.
"All of which backs the case for the RBA to hold steady," Adam Carr, senior economist at ICAP.
"I think after the bank has already cut so aggressively, effectively pre-empting a slowdown, it has time to wait and assess the impact from any increase in unemployment over the next few months."
