Australia's Westpac-Melbourne Institute index of consumer sentiment fell 7.9 percent on the month in May, declining to 79.0 from 85.8 in April. Respondents reported significantly weaker confidence about the outlook for the economy and their personal finances over the next 12 months, while their assessment of longer-term economic prospects also deteriorated.

This month's survey was conducted last week, just before and just after the Australian government delivered its annual budget and announced a range of fiscal measures aimed at offsetting cost of living pressures on households. The survey shows that respondents who were surveyed after the budget was announced were less optimistic than those who were surveyed before. Of those surveyed after the budget, more believed that the budget would make them worse off than better off.

The survey was also conducted around a week after the Reserve Bank of Australia unexpectedly raised policy rates by 25 basis points early in the month after they had left them on hold in April. Despite this additional rate hike, the proportion of respondents who still expect at least another 100 basis points of interest rate increases over the next 12 months has risen from around a third last month to around 40 percent this month. Nevertheless, respondents reported a more positive assessment of the outlook for house prices and subdued but improved sentiment on whether now is a good time to buy a house.

The Westpac-Melbourne Institute Index of Consumer Sentiment is based on a survey of 1,200 consumers on their assessment of short-term and long-term prospective economic conditions and their own financial circumstances. The survey is conducted early each month, usually just before and just after the Reserve Bank of Australia's monthly policy meeting.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is on whether economic growth is too strong and leads to inflation.

Consumer spending is the largest part of economic activity, so markets always closely follow consumer behaviour and sentiment. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.