UPDATE 2-Australia retail sales surge, odds lengthen on rate cut

Wed Apr 3, 2013 9:55pm EDT

* Retail sales jump 1.3 pct in Feb, vs forecasts of just
+0.3 pct
    * Home building approvals also beat estimates with a rise of
3.1 pct
    * Lifts A$ as market sees less chance of another rate cut

 (Adds auto sales, reaction)
    By Wayne Cole
    SYDNEY, April 4 (Reuters) - Australian retail sales surged
by the most in three years in February, blowing away
expectations in the clearest sign yet that consumer demand is
responding to lower interest rates.
    The startling surprise lifted the local dollar and led
investors to further lengthen the odds of any more cuts in
interest rates this cycle.
    "Clearly very strong, very surprising," was the reaction of 
 Stephen Walters, chief economist at JPMorgan, the data.
    "Near-term chances of a rate cut are very slim," he added.
"I think the Reserve Bank has been looking for a few things --
one of them has been whether the household sector has been
recovering and on this evidence they clearly are."
    The Reserve Bank of Australia (RBA) held rates steady at 3
percent at its April policy meeting this week in a show of
confidence that 175 basis points of rate cuts since November
2011 were percolating through the economy.
    Thursday's data from the Australian Bureau of Statistics 
showed retail sales surged 1.3 percent in February, far
outstripping forecasts of a 0.3 percent increase. It was the
largest monthly gain since November 2009 and followed an
upwardly revised 1.2 percent rise in January.
    The spending was also broad based, with every retail sector
enjoying gains of over 1 percent for the month. Sales of
household goods jumped 1.6 percent, clothing was up 1.2 percent,
department stores 1.6 percent and eating out 1.3 percent.
    The Australian dollar shot up as far as $1.0495 on
the upbeat news but could not clear heavy options-related offers
at $1.0500, a major chart level.
    Interbank futures <0#YIB:> reversed course while swap rates
showed the market pricing in around 15 basis points of rate cuts
over the next 12 months, compared to 20 just before the data.
    
    
    BUYING AND BUILDING
    The revival in sales is a boon for the economy as the A$260
billion ($265 billion) retail sector accounts for 17 percent of
Australia's A$1.5 trillion in gross domestic product (GDP) and
over 10 percent of all jobs.
    A range of factors are supporting consumption including
lower mortgage rates, widespread retail discounting, solid wage
growth and a recovery in household wealth.
    Consumers clearly have spending power if the demand for new
cars is anything to go by. Industry figures out Thursday showed
sales of new vehicles climbed 4.7 percent in March, from the
month before, when adjusted for seasonal factors.
    All this consuming will be welcomed by the RBA as it
promises to plug any hole left when a long boom in mining
investment starts to cool later this year.
    Indeed, the news was doubly good as government data also
showed a solid 3.1 percent increase in approvals to build new
homes in February.
    Housing accounts for only around 5 percent of GDP, but it is
prone to large swings year to year. For instance, a typical
recovery in home building can add anywhere from half to a full
percentage point to economic growth.
    "Traditionally, the building sector has led the economy,"
noted Matthew Johnson, an interest rate strategist at UBS.
    "They expect mining is going to drop back a bit and that
will make space for non-mining, and that is what we are seeing
today. It supports the view that the RBA will be on hold for the
rest of the year, which is the view we have."

 (Editing by John Mair)
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