A neat summary from CBA:
The 2012‑13 Budget delivered an underlying cash surplus of $1.5bn. The result had been well telegraphed and consequently had virtually no impact on financial markets.
The swing in the budget balance from 2011‑12 to 2012‑13 is a record 3% of GDP. We judge this overstates the degree of fiscal tightening due to various accounting tools essentially aimed at shifting expenses out of 2012‑13 into other years. Some of that has been pulled forward into the final weeks of 2011‑12 – in fact, the June cash splurge and last week’s 50bp rate cut could generate a spurt in retail sales in coming months that markets react to.
In our view, however, the Budget is clearly favourable for the Aussie bond market. We estimate the true swing in the Budget to be around 2% of GDP. Legitimate fiscal tightening is much less. But that will still bear down on the weak non‑mining part of the economy, which the Government estimates will grow by just 2%. Unemployment is also headed higher on the Government’s numbers and core inflation is set to remain low. The market should keep pricing multiple rate cuts in this environment. The RBA ultimately cut the cash rate 250bps in the two years after the last concerted fiscal consolidation in Australia in 1996.
The Budget also serves to highlight the divide between Australia and advanced economy peers. Most are years away from producing budget surpluses and stabilising their call on debt markets. The fact this is happening right now in Australia all but guarantees the AAA/Aaa rating is here to stay, as affirmed by S&P and Moody’s this evening. That should boost demand for our bonds. But the supply of paper is also reduced, with new issuance down from $44bn to just $9bn in 2012‑13. We think that points to a narrower premium over US Treasuries (forecasting 130bps for 10‑years) and wider swap spreads than in the past.
