The ASX200 Index ended the day down 0.35% ahead of the release of the Federal Budget tonight.
Real Estate, Energy and Tech stocks led the decline with all 11 GICS sectors ending in the red except Consumer Discretionary, Healthcare, and Utilities.
More cost-of-living related subsidies for households, including support for people renting and energy bills, is expected in tonight’s Federal Budget. It is also expected to include headline CPI forecasts that are lower than that of the Reserve Bank.
Treasury is set to forecast headline 2023/24 CPI inflation of 3.5%, down from 3.75% in the mid-year update and below RBA forecasts of 3.8%. The government is maintaining its forecast inflation of a drop to 2.75% in 2024/25 — unchanged from mid-year and below the RBA forecasts 3.2%.
Treasurer Jim Chalmers explained the difference between the government's and RBA's inflation forecasts is "just a function of timing" given the RBA did not know the contents of the Budget 2024-25 at its May meeting last week.
"Belt-tightening only clear solution"
Webull Australia CEO Rob Talevski commented on expectations around the Federal Budget:
“It’s a vicious circle – consumers are forced to spend more to keep up with inflation, which, in turn, feeds inflation. On the one hand, you’ve got households doing what they can to trim discretionary spending and downgrade the scale of non-discretionary items, then you’ve got the government providing fiscal stimulus.
“The absence of coordination between the RBA, the government and consumers brings Australian economic dynamics to an impasse. Debt repayments and household essentials may be the beneficiaries of tax cuts and HECS relief in the current environment.
"So, consumers and the RBA are doing what they can to help, which leaves the government in a position where it ought to deliver a tough budget. However, politics is getting in the way, which we’ve seen in the headlines about quantum computing, renewables investments and domestic violence.
“The quicker the RBA can get inflation and rates expectations back to where they want them to be, the less we’ll have to worry about the prospects of longer-term negative cyclical dynamics like stagflation.
"All roads lead to pain, but the more political pain, the less broad economic and consumer pain. Fiscal belt-tightening seems the only clear solution.”
NAB Business Confidence
The NAB released its Business Conditions report for April, which indicated that conditions are now back to long-term average levels, after businesses reported a decline in both trading and employment conditions, while profitability conditions remained steady over the month. Although, on a trend basis, NAB’s Business Conditions index has been slowly declining since late 2022.
Forward orders fell by a relatively large 6 points, to -7 index points, a further sign that businesses expect weaker conditions to come. Forward orders declined by the greatest amount in the mining, manufacturing and construction industries.
CreditorWatch chief economist Anneke Thompson said the NAB data reflects CreditorWatch’s Business Risk Index’s average value of invoice data, which while recording an increase in March 2024, has been on a strong downward trend since early 2021.
CreditorWatch data also shows that credit enquiry growth is slowing considerably, and has been mostly in negative territory since August 2023.
“In more positive news, slowing business activity is a positive sign for inflation, particularly given the slowing forward orders in the construction sector, which may lead to some slowing of price growth in materials,” said Thompson.
“The Federal Budget will be watched closely for further help in the fight against inflation, with Treasurer Jim Chalmers earlier revealing that Treasury forecasts for inflation have the figure back within the target band by the end of 2024, well ahead of the RBA’s recent forecast.”
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