Australian Markets Weekly: Federal Budget preview

The 2017-18 Federal Budget will be handed down at 7.30pm on Tuesday 9th May. This week will likely see further budget measures revealed in the press as has become practice in recent years.

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Budget preview

  • We expect an underlying cash balance of $23-25bn in 2017-18, some $4-6bn better than predicted at the Mid-Year Budget review (MYEFO).
  • The Government is likely to continue to focus on gradual improvement in the balance, so as to build fiscal flexibility, maintain the AAA credit rating (which we think is unlikely to be affected after this Budget) and not upset the recovery.
  • The global economic backdrop is improving which will be helpful. Most focus/debate is likely to be over the extent to which the government assumes wages growth and consumption will strengthen, given current low wages growth. The Treasurer has already re-committed to using conservative commodity price assumptions, which is good practice and delivered an upside surprise last year in place of the downside surprises that have been commonplace in the past 4-5 years.
  • Three initiatives likely in this budget are: (i) a Housing Affordability package; (ii) an increased focus on the Net Operating Balance (which compares recurrent expenditures and revenues); and (iii) a related categorization of debt into good and bad debt, the latter designed to highlight that borrowing is OK for infrastructure and productivity-enhancing purposes, but not for day-to-day spending.
  • It’s also quite likely that the Government will announce or foreshadow increased infrastructure spending (eg Sydney’s Second Airport, the Inland Rail project), some of which may be “off-budget”. Ratings agencies will likely continue to focus on general government sector debt when considering Australia’s AAA rating, not government business enterprises, such as the NBN.
  • Markets last week were most influenced by Australia’s low CPI and President Trump’s tax plans (equities up, no change in interest rates in Australia in the next year priced and the $A a bit weaker as a result of the latter).
  • Locally this week it’s all about the RBA (Board Meeting Tuesday – no change expected); Speech by the Governor on Household Debt, Housing Prices and Resilience on Wednesday (this will be important); and the May Statement on Monetary Policy on Friday (little change to CPI forecasts expected; GDP forecasts to be impacted by Cyclone Debbie, but not in a policy-significant way. More favourable global backdrop likely to be highlighted.
  • Offshore, there is a raft of US data and events, with an FOMC meeting expected to see no change in US rates announced early on Thursday morning Australian time. NAB sees the next US rate hike in June and continues to see the market as under-pricing the extent of US rate hikes over the next couple of years. Updates on how well the US economy is travelling will be provided by the important ISM (Mon), Non-Manufacturing ISM (Wed) and Non-Farm Payrolls on Friday. Tonight sees an update on how close to the Fed’s mandate US inflation is getting, with the PCE deflator.

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