Australian Federal Budget and implications for the ASX200

The Australian Federal Government was one of the quickest to react to the onset of the pandemic, providing stimulus payments to households and to businesses to shield the economy. A strategy that proved highly effective, enabling the Australian economy to return to pre-pandemic levels just 14 months later.

Households and businesses are cashed up and monetary and fiscal policy settings remain supportive. Prices for key commodities continue to surge as do housing prices, while business and consumer confidence is at decade highs.

The current unemployment rate of 5.6% is lower than Treasury’s forecast of 5.75% in 2022-23, two years ahead of schedule. As a result tax receipts have been higher and welfare payments have been lower than forecast.

However, challenges remain.

The tardy vaccine roll-out is unlikely to see international travel resume until the end of 2022 weighing on the tourism, education, and hospitality sectors. Furthermore, pre-pandemic economic activity was below potential growth levels and the reason why the RBA cut interest rates three times in 2019.

In a pre-budget speech in late April, Treasurer Josh Frydenberg confirmed a pivot in fiscal strategy, away from fiscal repair until the unemployment rate was lower than before the pandemic. Previously it was indicated budget repair would commence once the unemployment rate was below 6%.

As such Tuesday's budget will likely remain expansionary and feature lower budget deficits. According to AMP’s Chief Economist, Shane Oliver, the deficit will be approximately $150bn this financial year and $50bn the next financial year (down from the $214 billion and $112 billion forecast in the 2020 October budget). A return to surplus may be possible in five years.

Implications:
The fiscal support provided in Tuesdays Budget along with the RBA’s ultra-easy monetary policy settings will continue to provide underlying support for the ASX200 in the medium term.

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In the short term, there are signs the uptrend is losing momentum as illustrated by the bearish divergence displayed on the RSI indicator. Therefore the preference is to use a pullback in the coming weeks, towards trend channel support near 6800 to consider long positions, in expectation of a break above the all-time high at 7197.2, towards 7400.

Source Tradingview. The figures stated areas of the 6th of May 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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