Australian Markets Weekly: 8 May 2017

Any budget has inherent conflicts and trade-offs in it, for example, between the short-term macro needs of the economy and the desired medium-term fiscal policy settings; and between the myriad of policy, social, intergenerational and political aspects of any policy changes.

By

Judging the budget

  • We suggest a number of yardsticks by which to judge the Government on tomorrow night’s budget, namely:
    • the credibility of the short-term macro and budget forecasts;
    • the appropriateness of the medium-term fiscal settings;
    • the policy measures in the budget; and
    • the fairness of the budget.
      [Politicians would add the politics of the budget!].
  • Importantly, we suspect the Government will continue to forecast a return to balance/small surplus by 2020-21 on an underlying cash balance basis and likely a year earlier on the new favoured Net Operating Balance (NOB) of the budget. This should be sufficient to maintain Australia’s AAA rating, albeit with a continued negative outlook from S&P. The increased focus on the NOB is hoped to broadly restrain growth in recurrent spending across time.
  • There will also be separation of government debt into “good” and “bad” debt – the former effectively funds an excess of recurrent spending over recurrent revenues; the latter funds infrastructure and other capital investment that can boost the economy’s productivity or provide a financial return to the country across time.
  • In terms of policy, we know there will be significant new infrastructure spending on Sydney’s second airport and the inland rail line between Melbourne and Brisbane. And Housing Affordability will also be a centrepiece of the Budget, with the government to continue its push to increase supply, via land release, infrastructure investment and possibly some measures to encourage downsizing by retirees and penalise vacant supply held by foreigners. There is rumoured to be some assistance for First Home Buyers saving for a deposit and a new public fund to borrow for low-cost social housing.
  • Locally this week, tomorrow’s ABS Retail Trade report for March will, with the monthly reading on March, also provide quarterly volumes as an important element of Q1 household consumption and GDP.  Then the market will be focused on whether there are any material surprises in tomorrow night’s Budget.
  • Offshore, the RBNZ and BoE meet as are G7 Finance Ministers. The RBNZ meeting could be market moving, our BNZ colleagues sending out a report this morning, noting emerging inflation and rising inflation expectations, but that the RBNZ is only likely to shift to a modest tightening bias. US CPI and Retail Sales reports released later in the week will be important watch points, as will the no less than eight Fed speeches this week and commodity prices after last week’s sharp falls in iron ore and oil prices. The falls in commodity prices, continuing tightening in the US labour market lie behind the fall in the $A, which NAB continues to expect to end the year close to US$0.70.

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