Retail Sector Expectations May Be Too High

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By Chris Shaw

While the market had factored in this week’s increase in interest rates, the decision by the Reserve Bank of Australia (RBA) to lift rates was given further justification by the release of retail sales figures for June, which rose by more than the market had anticipated.

The actual figure showed an increase of 1%, which was well above market consensus estimates of a 0.6% increase.

Merrill Lynch suggests the figure is consistent with other indicators pointing to a strengthening in economic activity, including stronger employment data and higher levels of capacity utilisation.

Deutsche Bank agrees, noting the sales figure supports the view growth momentum in the economy overall remains solid, which limits the potential for any collapse in consumer confidence coming from higher interest rates.

According to UBS it also supports the RBA’s view of a moderate outlook for consumer spending, due in part to the time lag from the May interest rate increase meaning its effects are yet to fully flow through into the economy. The broker suggests the key to the retail sales figure remains prices rather than volumes, as prices rose by 1.1% in the quarter for their highest rate of increase in five years while volumes were lower than expected.

This is significant as it implies ongoing upward pressure on inflation, Merrill Lynch noting the retail price deflator rose 1.1% for the quarter. This represents an annual rate of 2.3%, up from 1.8% last month. The price deflator is a variable weight price index, hence the difference in its result compared to the consumer price index.

Of relevance to the market, the broker points out the latest retail sales figure, which equates to an annual rate of 5.6%, supports its view of fairly flat conditions in coming months, with retail sales likely to show annual growth of between 5-6% by the end of the year.

In contrast, it suggests retail stocks are being priced on expectations of sales growth of about 10%, but the latest increase in rates makes it unlikely this figure will be achieved.

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