Department store Myer, which has struggled with weak sales for years, reported its best-ever sales figures for the first five months of the financial year. Likewise, JB Hi-Fi also reported record sales and earnings in July-December last year.
There’s a lot riding on the latest retail sales figures.
The Reserve Bank of Australia will look at those numbers and any other indicators it can get its hands on when its board meets on Tuesday to determine what to do with interest rates.
The bank will probably stick with another rate rise – the ninth in a row – but it might signal that it’s close to stopping or pausing the rate hike cycle while it waits for more evidence of the cumulative effect of rate rises thus far.
And that would have its own knock-on effects.
A pause or slowdown in rate rises would reduce the chance of a hard landing for the economy and perhaps increase the RBA’s chance of achieving the central bank’s Holy Grail: cooling inflation without tipping the economy into recession. If the bank pauses too early, inflation might gather steam again, calling for even more interest rate hikes in the future.
Investors will also be pondering the mixed data and second-guessing the RBA. An end to the rate hiking cycle will underpin stock valuations and give the share market a boost.
So how do we reconcile weak official data with strong results reported by companies?
One argument is that official December retail sales were not as weak as they appeared, because some of the end-of-year spending was pulled forward into November’s Black Friday sales. The term refers to the first Friday after Thanksgiving and traditionally marks the beginning of the Christmas shopping season in the US. Black Friday has become a major internet sales event globally, including in Australia.
This would have played havoc with the Australian Bureau of Statistics seasonal adjustment, whereby it smooths out the data to take account of regular factors such as Christmas sales.
The likely effect of Black Friday sales was reflected in last December’s data, with the biggest falls in spending in categories including household goods, and clothing and apparel – products people often buy online.
However, spending on dining out and takeaway meals was steady. This is telling because restaurant meals and junk food are usually among the first items consumers cut back on when they’re feeling the pinch.
Additionally, even if the official figures are right, they’re not as weak as they first appear.
Retail sales grew every month last year except in December and even the lower December figure was the sixth highest-ever month of retail sales.
More recent data isn’t much help in untangling this puzzle.
Debit and credit card data from the Commonwealth Bank showed a solid start to spending in the first three weeks of 2023. But even then, the picture isn’t clear. In January last year, Australia was in the midst of surging Covid cases, which would have kept many consumers at home.
While it’s hard to work out what the consumer is doing, the share market appears to have made up its mind, at least for the time being. The ASX 200 reversed all of last year’s losses in January alone.
Under the scenario favoured by some investors, the RBA will stop lifting rates and the economy will achieve the fabled soft landing, with corporate profits continuing to grow and stock prices continuing to rise.
But the market might be getting ahead of itself. In the coming weeks, some of Australia’s largest companies will report their earnings for the six months to December and provide commentary on how they expect to perform for the rest of the year.
We have yet to see how interest rate rises, labour shortages and supply chain disruptions will affect their profits.
And there is also the consumer spending slowdown to consider.
It’s not a question of ‘if’ the consumer will stop spending with abandon, but ‘when’.
If it hasn’t happened already, it’s a good bet that it will by the middle of the year, when homeowners will face a cumulative A$700 billion increase in home loan repayments as mortgages switch from lower fixed interest rates to floating interest rates.
Some homeowners have been stashing money away to prepare for the rate rises, but many others will cover the increased mortgage payments from their pay packets, leaving them with less to spend each week.
