Australia's Westpac-Melbourne Institute index of consumer sentiment rose to 98.5 in August, a sharp increase of 5.7 percent from 93.1 in July and its highest level in more than three years. This survey was conducted last week, just before and just after the Reserve Bank of Australia cut policy rates by 25 basis points. Those surveyed after the RBA decision were more positive than those surveyed before.

Respondents to the survey reported stronger confidence in the outlook for the domestic economy and their personal finances over the next twelve months and are also more confident about the five-year outlook for the economy. Respondents are more confident rates will fall in coming months, with around 60 percent of respondents with a mortgage expecting mortgage rates to be lower twelve months from now.

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.