Budget digest

Just hours post Fed chair Powell’s pleas for more fiscal stimulus, warning of the dire consequences without, President Trump took to twitter to shelve the stimulus talks with the Democrats until after the election. Of the back of the bizarre move to pause negotiations on more aid, risky assets reversed course with the S&P 500 giving up most of its gains from Monday, the Aussie dollar took a beating with Treasuries gapping higher and the DXY rallying. Gold falling back below 1900/oz as DXY pushed higher.

US futures have crept back into positive territory, highlighting that volatility and range bound markets will likely be a continuing feature of risk assets pricing a rolling reassessment of election uncertainties as the final dash to November 3 draws closer. Erasing losses as Trump tweets calling on congress to approve $25b in airline payroll assistance and $135b for the paycheck protection program for small business. This alongside tweeting his willingness to send stimulus cheques ($1,200) in a standalone bill if presented. An interesting turn of events that may backfire, time will tell if the brinkmanship floats. Increasingly, Trumps behavior seems more erratic as his odds of re-election deteriorate. If the Democrats concede (unlikely), households will be sent another round of direct payments, bypassing the state aid the Democratic negotiators are arguing for. There is little incentive for the Dems here.

Despite the jitters overnight and the ongoing US political noise keeping traders on edge, the ASX 200 has climbed higher in today’s trade with one eye on the stimulatory budget unveiled last night and another on US futures recouping losses throughout the session.

This following the unveiling last night of an expansionary budget, aimed at engineering a private sector led recovery and the RBA signaling their willingness to ease further. High unemployment now a “national priority” in the words of the RBA, setting the stage for further action in November as both the monetary and fiscal policy levers are to be used in righting the Australian economy.

The budget, which pushes the deficit to a peacetime record, is focused on rebuilding the economy post the COVID-19 crisis through a range of measures including wage subsidies, tax cuts, infrastructure spending and business investment.

The spend is entirely necessary to bridge the gap between recession and the post-pandemic normal. Without the fiscal support, the economy would be in a far worse position, and any question marks should lie in, has enough been done. The economy did not enter this crisis from a position of strength and in order to reinvigorate growth and productivity, reform is much needed. Against this backdrop measures centered around stimulating aggregate demand and pivoting toward a more sustainable future growth model are notably MIA in this budget.

As the pandemic induced crisis ravaged the economy, government support measures like the JobKeeper and JobSeeker payments have been successful in cushioning the deficit in demand. In effect bridging the gap the normalcy whilst the economy suffered under the weight of lockdowns, viral outbreaks and border closures.

This budget is aimed at pivoting away from those support measures toward the rebuild of the economy post crisis. This includes getting people back to work, creating jobs and injecting confidence into both businesses and households in order to promote spending, investment and hiring.

This budget provides a good start in tracking the road to recovery; however, as is always the case there are winners and losers. The world is experiencing a recession like no other, and in these extraordinary times, perhaps the budget could have been even more extraordinary in itself.

For the market, the budget announcements certainly make for some great headlines, but there were few surprises given the many leaked announcements in recent weeks. This aside the budget is business/market friendly and broadly supportive of investor sentiment alongside easing restrictions in Melbourne and borders beginning to reopen. The income tax cuts will help to maintain discretionary spending which has held up well throughout the crisis. However, the already high valuations across discretionary retailers leaves little room for disappointment and is a deterrent.

The most obvious beneficiaries are those likely to benefit from the infrastructure and construction components, like Cimic, Wagners, Monadelphous, Boral, Adbri, Downer EDI, Lendlease. More broadly, the budgets pro-growth focus supports a cyclical tilt, leveraging off the reopening/recovery of the economy. And with the ASX 200 index having been stuck in tight range for months, the confirmation of a supportive budget, another move from the RBA and progress in containing the virus in Victoria, with borders on track to open and restrictions easing up provide support for the index to breakout. In addition the banking sector may be ready to pick up the baton and do some of the heavy lifting on the ASX. Continued "return to normal", a pro-business budget, ongoing consumer support and potential responsible lending changes providing a catalyst for the banking sector to trade higher, at least on a tactical basis. Clearly a remaining hurdle for the index performance will be additional clarity surrounding the US election given the Aussie markets typically take their lead from Wall Street. But with a clean election result and the aforementioned factors in play combined to lift investor sentiment the catalyst for a move higher toward year end is in play. However, with the US presidential race drawing close and the possibility of a contested outcome remaining, the continued range trade for the ASX 200 remains the most likely outcome for now.

For the economy, it is a mixed bag. A missed opportunity to boost aggregate demand and innovate. Childcare, renewables, green infrastructure, permanent changes Jobseeker, social housing all notable reforms missing from the budget.

With less direct income support in the budget, the fiscal cliff that arises in 2021 as income support is pared back and mortgage deferrals will not be offset.

The budget is most notably pro-capex. The capacity for businesses to instantly write off the full value of an asset purchased prior to June 2022 will stimulate investment. The measures will bring forward investment spending providing a sizable boost to the economy and support long-term productive capacity.

The JobMaker hiring credits provided to businesses as an incentive to hire under 35s are a positive measure aimed at reducing unemployment amongst younger Australians. Supporting the pivot away from economic life support measures toward the rebuild of the economy post crisis. Alongside the apprenticeship subsidies which provide opportunities for businesses to hire and train younger members of the workforce. Already experiencing higher levels of unemployment and underemployment prior to the pandemic, younger members of the workforce have been disproportionately hit with employment more likely centered in industries hit hardest by lockdowns. These measures a good start in addressing the long-term effects that the crisis inflicts on younger Australians.

Already legislated tax cuts have been brought forward and backdated to 1 July this year, providing taxpayers with a boost to disposable income. The Low and Middle Income Tax Offset will also be extended for another year. These measures should continue to support consumer confidence and help to support household incomes as JK and JS payments are wound back. Although, how effective these measures are will depend on the consumer’s propensity to spend the additional income. With the economic outlook remaining uncertain and consumers already saddled with record-breaking levels of household debt the propensity to save the windfall is increased. That is why measures like permanently increasing JobSeeker payments typically have more bang for their buck as the transfers are directed at individuals who have a higher marginal propensity to spend the additional income.

The Budget announced a significant infrastructure spend which should promote job creation. In addition to the $14b new and accelerated projects an additional $2b of investment into road safety projects, and a further $1b for local roads, footpaths and street lighting was announced. Setting the stage for states to follow up with the funding provided on a “use it or lose it basis”

With the focus primarily on the private sector, the key to this budgets success will lie in the response from businesses and households. In tandem with the economic outlook/forecasts embedded within the budget, the budgets lack of innovation rests on an optimistic assumption that the measures presented are enough.