Macro (Re)view (8/8) | Tech fuels equity rally

The US tech sector led global equity markets higher this week, largely reversing last week's declines. A lack of new catalysts to unsettle markets saw G10 currencies rising against the US dollar, while global bond yields increased a little. Tariff exemptions granted by President Trump to semiconductor producers in exchange for commitments to either re-shore or commencing manufacturing in the US fuelled the equity rally - though details remain vague. Trump's nomination of Stephen Miran - his top economic advisor at the White House - to replace Adriana Kugler on the board of Fed governors following her resignation was another development of note. Miran's nomination, yet to be confirmed by the Senate, did not lead to any notable renewal of the concerns in markets over the politization of Fed policy; the tenure would be short term, running only until the end of January, and with the Senate currently in recess, Miran wouldn't commence until after the September Fed meeting. 

The Bank of England's decision to cut rates by 25bps to 4% this week was expected, albeit on a much finer margin than envisaged. The 5-4 majority for the decision was reached only after a second vote - a first in the Monetary Policy Committee's nearly 30-year history - after the first produced an impasse where 8 members were split down the middle between cutting by 25bps or leaving rates on hold, while the one remaining vote was for a 50bps cut. MPC member Taylor switched his vote in the second ballot from a 50bps to a 25bps cut to deliver the 5-4 majority. This was the 5th reduction of the easing cycle and continued the BoE's sequence of quarterly rate cuts, a pace it continues to describe as 'gradual and careful'. 

In the post-meeting press conference, Governor Bailey said that further easing would depend upon continued disinflationary progress - but the outlook is complicated. The BoE's latest Monetary Policy Report revealed that the inflation forecasts have moved higher (3.8% in 2025, 2.7% in 2026) - and upside risks have increased. On the other hand, the growth outlook is modest (1.2% in 2025, 1.3% in 2026), with downside risks attached. The BoE is easing into an outlook for higher inflation because it doesn't think that will last; however, given the experience of recent years, it is wary of higher headline inflation becoming more of a persistent threat in wage and price settings. Some of those concerns are attenuated by the MPC's view that the economy is operating below capacity, leading to lower inflationary pressures. Governor Bailey said how this 'balance of risks' plays out will direct policy. 

In Australia, despite July's surprise on-hold decision from the RBA, markets fully expect a 25bps rate cut to be announced at next week's meeting. Since the July meeting, the all-important Q2 inflation data confirmed that inflation remains well on track with the RBA's forecasts to hold at the midpoint of the 2-3% target band (see here). Meanwhile, signs of softening in the labour market have also emerged (see here). On the data front this week, household spending was reported to have lifted 0.5% in June, consistent with robust retail sales data. Meanwhile, the trade surplus widened sharply to $5.4bn in June as safe-haven demand for non-monetary gold in volatile market conditions drove exports to their fastest rise (6%) since September 2022.  

Australia's trade surplus widens to $5.4bn in June

Australia's trade surplus came in at $5.4bn in June (vs $3.7bn expected), rebounding from much narrower surpluses in April ($4.2bn) and May ($1.6bn). Exports saw their fastest rise since September 2022, accelerating by 6% in June as non-monetary gold exports surged to record highs on safe-haven demand in a volatile period for financial markets amid uncertainty around the US administration's new tariff regime. Monthly imports slowed with a 3.1% fall after rising by more than 5% over April and May. 

The trade surplus was $5.4bn in June, substantially wider than in May ($1.6bn) and comfortably above its level in April ($4.2bn). Collectively, the surpluses of the previous 2 months were revised down by around $1.3bn. This was a particularly volatile period in global trade following the long-awaited announcement by the Trump administration in early April of the United States' new tariff regime. Trade activity was pulled forward to front run the tariffs, leading to a pullback thereafter while uncertainty over tariff rates and timelines saw the US dollar - historically a source of stability in turbulent times - become the driver of volatility in foreign exchange markets. Looking back on the period, monthly trade surpluses averaged $3.7bn in the quarter, a step down from their average in the March quarter ($4.3bn). 

June exports lifted by 6% to $44.3bn, up 2.6% on 12 months ago. The standout factor in the month was non-monetary gold (36.7%), which hit a new record high ($5.8bn) as volatile trading conditions and economic uncertainty - as well as increased expectations for rate cuts - drove demand for the safe-haven asset. Non-rural goods also contributed with a 3.1% rise in June as coal (17.3%) and iron ore exports (2.3%) advanced.   

Imports weakened in June falling by 3.1% to $39bn but were still up by 3.1% through the 12 months. Capital goods (-9.1%) and consumption goods (-5.5%) saw large declines in the month - though both had risen at pace in April and May. 

For the June quarter, export revenue was $129.2bn, essentially held flat (-0.1%) from its level in the March quarter. Last week, the ABS reported that export prices fell by 4.5% in the quarter, with the uncertainty over global trade and the growth outlook weighing on commodity prices. Export revenue holding flat in this backdrop is a decent outcome. For imports, spending rose by 1.5% in the quarter to $118.1bn. Spending on both capital and consumption goods increased by more than 4% for the period. Import prices were clocked declining modestly by 0.8%q/q, unlikely to have given demand any meaningful support.  

  

Macro (Re)view (1/8) | Payrolls prompts 180

Weak US payrolls data upended markets going into the weekend, with a rethink of Fed policy now firmly on the cards. Conditions had been fairly sedate through President Trump's new tariff announcements and the Federal Reserve's latest meeting, but cracks emerging in the US labour market drove US and European equities to sharp declines. The US dollar gave back gains from earlier in the week alongside significant declines in Treasury yields, led by the front end of the curve as traders moved to price in two Fed rate cuts by year end. Despite advancing on Friday, the AUDUSD ended the week sharply lower on expectations that soft June quarter inflation data will tip the RBA's hand into further rate cuts.    

July's nonfarm payrolls report blindsided both markets and the Fed, indicating that conditions may be much less robust than thought. After the Fed left rates unchanged in the 4.25-4.5% range this week, Chair Powell's message in the post-meeting press conference was that policy was 'well positioned' in a modestly restrictive zone, with inflation a bit above the 2% target and labour market conditions assessed as broadly consistent with its maximum employment objective. The Fed's preferred inflator measure - the core PCE deflator - held a 2.8%yr pace in June. 

July's nonfarm payrolls report - while only one data point at this stage - was a surprise as employment rose by 73k on the month, disappointing expectations for a 106k result and pushing the unemployment rate up from 4.1% to 4.2%. Labour force participation was a tick lower at 62.2%. The major shock however came as gains to payrolls in May and June were reduced by an enormous 258k. This lowers the 3-month average change in payrolls to just 35k - its weakest momentum since the pandemic. Weak payrolls growth comes in a backdrop of slowing economic growth. June quarter GDP growth was better than expected at 0.7%q/q, but that mainly reflects tariff-related volatility. Across the first half of the year, GDP growth was 0.6%, well below its 1.4% pace from the back half of 2024. 

In the euro area, GDP growth was 0.1%q/q in the June quarter, levelling out after growth of 0.6% in the March quarter. Export orders to the US had boosted growth through the March quarter to front run Trump's tariffs on European-made goods. The EU-US trade deal, although resolving some uncertainty for businesses, has slapped a 15% tariff at the US border on imports from Europe. July's inflation estimate came in at an unchanged 2%yr on a headline basis - a touch above the 1.9% consensus - while the core rate held at 2.3%yr. Traders currently see the ECB leaving rates on hold through year-end. It is a different story in the UK, with the Bank of England expected to cut rates by 25bps at next week's meeting. 

Confirmation of ongoing disinflation in Australia effectively paves the way for a reluctant RBA to cut rates at its upcoming meeting on August 11-12. The Monetary Policy Board surprised markets with its decision to hold the cash rate at 3.85% last month, opting to wait for this week's quarterly CPI data rather than moving on the higher frequency but more volatile monthly series. In the key outcomes, both headline (0.7%) and core CPI (0.6%) came in 0.1ppt below market expectations in the June quarter (full review here). Annual inflation is comfortably inside the 2-3% target band, slowing from 2.4% at 2.1% on a headline basis (vs 2.2% expected) and from 2.9% to 2.7% on core (vs 2.7%). Importantly these outcomes are also consistent with the RBA's forecast track, which Governor Bullock has said is a prerequisite to a further reduction in the cash rate. 

A number of effects are swinging headline inflation around, including electricity rebates that are unwinding and volatile fuel and food prices, so the focus for the RBA has been on the core rate. Here, core inflation has been running at an annualised 2.6% pace through the first half of the year - essentially where the RBA wants it to be on the midpoint of the target band. That is backed up by services inflation - a persistent thorn in the RBA's side - easing from 3.7% to a 3-year low of 3.3%. Speaking post the release, RBA Deputy Governor Hauser said the inflation data were welcome but stuck to the 'gradual and cautious' line around lowering rates.  

Also of note in Australia, retail sales turned out a 1.2% splurge from households in the midyear sales in June (vs 0.5%), the strongest rise in spending since March 2022, as the 75-year-old survey came to the end of the line this week on a high (see here). Dwelling approvals also surprised upside posting an 11.9% rise for June, driven by the volatile higher density segment; approvals, however, remain well contained and declined across the quarter (see here). 

Australian dwelling approvals surge 11.9% in June

Australian dwelling approvals posted their largest rise in more than 2 years in June, increasing by almost 12% in the month on the back of a surge in higher-density approvals. Detached or house approvals declined in June (-1.5%), their third fall in the past 4 months. Approvals have lifted substantially over the past year (27.4%) but remain at levels well contained relative to peaks in earlier cycles. Higher interest rates - even with the RBA now winding back policy restriction - is one factor that is still likely weighing on the home building sector. 

Headline dwelling approvals accelerated to their fastest rise since May 2023 with an 11.9% lift in June - well above the 1.8% rise expected. This saw approvals cross 17k for the first time since August 2022, reversing the decline seen over February-April. Driving the surge was higher-density or unit approvals, the volatile segment seeing approvals jump 33.9% to a 30-month high in June (7.8k). By contrast, house approvals were down 1.5% to 9.3k - the level little more than flat on 12 months ago (0.8%). 

Despite June's strong rise, approvals declined by 3.4% across the quarter (47.3k). As with the headline result, higher-density approvals - although surging in June - lost ground in the quarter falling by 11.1% (18.9k). This weakness was partially offset by a 2.5% lift in house approvals (28.4k). This gain for house approvals was driven entirely by a strong result in April (6.4%), with declines later coming through in May (-1.1%) and as reported today in June (-1.5%).  

Remarkably, alteration approvals continue to remain in an uptrend - despite already being well above the levels that were seen through the pandemic when a range of stimulus measures were supporting home renovations. Alongside rising housing prices, tight housing supply and longer construction timeframes due to labour shortages could be relevant factors driving renovations.   

Australian retail sales sign off in style

Australian retail sales surged to their strongest rise since March 2022 after posting a 1.2% lift in June, well above the 0.5% increase expected. Mid-year sales discounting and the release of the Nintendo Switch 2 were key factors that prompted cautious households to loosen the purse strings on discretionary purchases. This was a stellar result for the retail sales series to sign off its 75-year history on, with the ABS now shifting to a broader measure of monthly household spending. 

Retail sales accelerated by 1.2% to $37.9bn in June, up 4.5% on 12 months ago. This was the fastest month-on-month rise for retail sales since March 2022, driven by discretionary sales that rose at a 19-month high (1.4%). In addition, sales growth for May was revised up from 0.2% to 0.5%. Retail sales were up 1% overall across the quarter, with monthly gains averaging 0.6% in the period - its strongest momentum by that measure since September 2022. 

The media release from the ABS reported that mid-year sales boosted spending on big ticket items including furniture (3%) and electronic goods (3.9%), the latter also supported by the launch of the Nintendo Switch 2. Clothing sales also lifted sharply (2%) due to discounting on winter lines.

As noted, retail sales rose by 1% overall for the June quarter. Growth in underlying volumes - sales adjusted for inflation - was 0.3%, a modest rise but above expectations for a 0.1% lift. Retail price growth eased to 0.6% in the June quarter and 2.4% over the year, down from 2.7% previously. This compares to headline inflation that was reported yesterday to be at 2.1% (see here). 

The key driver of volume growth in the quarter was household goods, driven by discounting. Volumes overall rose by 1.5% over the year - a vast improvement on their -0.3% pace 12 months ago. Historically, the volume data has flowed through to household consumption in the National Accounts; however, the ABS ceased this process at the end of 2024.

At the peak of the inflation surge, retail prices were rising by more than 7% year-on-year. A weaker demand backdrop and improved supply chains have been key factors in easing price pressures in the sector.    

At the state level, households in New South Wales came out to play - nominal sales there rising by 1.6% in June, their sharpest rise going all the way back to February 2022. Sales in Victoria and Queensland lifted by 1.2%. Western Australia has shown the most consistent profile for sales growth in 2025, though interestingly sales there slowed to 0.3% in the latest month.  

Australian Q2 CPI 0.7%, 2.1%Y/Y

Quarterly inflation in Australia was softer than expected in the June quarter at 0.7% on a headline basis and 0.6% in trimmed mean or core terms. The RBA defied expectations to cut rates earlier this month to await today's report. A rate cut in August now shapes as a straightforward decision with headline (2.1%Y/Y) and core inflation (2.7%Y/Y) comfortably inside the 2-3% target band and largely on track with the RBA's forecasts. Market reaction on the report was sharp as pricing for an August cut firmed to a lock, with 2 additional cuts to a year-end cash rate of 3.1% close to fully discounted as well.  

Headline CPI came in at 0.7% in the June quarter, a bit below the 0.8% figure expected and down from 0.9% in the March quarter. In annual terms, headline inflation slowed from 2.4% to 2.1% to be pressing the bottom of the target band. The figure was also in line with the RBA's May forecasts and below the 2.2% figure expected by markets. Softer headline inflation was backed up by encouraging signs in core CPI. 

The trimmed mean measure was 0.6% in the June quarter, below expectations for 0.7%. This saw the annual pace decline from 2.9% to 2.7% (vs 2.7% expected), its slowest since the December quarter of 2021 - but a tick above the RBA's 2.6% forecast.  

Inflation momentum, measured in 6-month annualised terms, has picked up on a headline basis to 3.3%, up sharply from 0.9% at the end of last year. However, that rise has been expected because household rebates on electricity bills have been winding down over the first half of the year. More importantly, core inflation is tracking at 2.6% in 6-month annualised terms, essentially in line with the midpoint of the RBA's target band.  

Moving to the specific dynamics in the June quarter, utilities remained a major driver of inflation adding 0.21ppt to quarterly CPI on the electricity rebate unwind. Durable goods (0.25ppt) and new dwelling costs (0.04ppt) - areas of concern highlighted by the RBA - both pushed up on inflation but fairly modestly. Groceries (0.17ppt) also added to inflation, driven largely by a strong rise in fruit and vegetable prices. At the other end of the scale, declines in fuel prices (-0.17ppt) weighed heavily on inflation in the quarter, as did domestic holiday travel (-0.17ppt) during the off-peak season.     

Another key aspect of today's report is that services inflation has cooled further. In the June quarter, services inflation slowed from 3.7% to 3.3% year-on-year, its slowest pace in 3 years. This has come on the back of an easing in some of the areas of persistent price pressures, including insurance - now at 3.9%Y/Y from a peak above 16%Y/Y a little over 12 months ago - and rents at 4.5%Y/Y, slowing from highs that pressed 8%Y/Y in early 2024. Goods inflation remained low easing from 1.3% to 1.1%Y/Y.   

Preview: Australian Q2 CPI

Australia's quarterly inflation report for the June quarter is due to be published by the ABS this morning (1130 AEST). This is the most comprehensive read on prices in the Australian economy, and for an RBA that is suspicious of the pace of disinflation implied in the monthly CPI gauge, the report is key to the near-term rates outlook. The RBA defied expectations to cut rates earlier this month, awaiting confirmation via the quarterly data that inflation is tracking in line with its forecasts. An August rate cut is essentially fully priced in already, so a hawkish repricing (higher AUD and bond yields) on upside surprises for the key inflation outcomes is where the volatility risk for markets sits going into the report.  

June quarter preview: Inflation trajectory key to further RBA rate cuts 

In today's report, headline CPI is expected to print at 0.8% in the quarter (forecast range: 0.7-0.9%), with the annual pace easing from 2.4% to 2.1% - in line with the RBA's May forecasts. Consensus for core or trimmed mean inflation is 0.7% (range: 0.5-0.8%) and 2.7% year-on-year, slowing from 2.9% currently but a little above the RBA's forecast for 2.6%. As a guide, annual headline CPI in the monthly indicator came in at 2.4% in April and 2.1% in May, while the trimmed mean measure was 2.8% in April and 2.4% in May. 

The June quarter inflation outcomes will be a key input for the RBA as they revise their inflation forecasts going into the August meeting. The outlook for headline inflation is fairly volatile, with the RBA currently projecting it to rise again over the back half of the year to 3% as cost-of-living subsidies unwind. By contrast, core inflation is currently seen maintaining an easing pace to end the year at 2.6%, nearly on the midpoint of the target band. The RBA is looking for today's report to confirm core inflation specifically remains on this sort of trajectory. 

Key items to watch out for in today's report are housing and durable goods prices. At the July meeting, RBA Governor Bullock highlighted upside risks to inflation from these sources based on the monthly data for April and May. Most focus will fall on the housing group (21% weighting in the CPI basket), which is seeing upward pressure from electricity rebates coming to an end and from home building costs that may be on the rise again.  

March quarter recap: Core inflation returns to RBA target band 

Quarterly headline inflation picked up to 0.9% in the March quarter, rising from 0.2% in the prior quarter alongside the fading impact of household electricity rebates. Nonetheless, the annual pace held at an unchanged 2.4%. Trimmed mean inflation firmed from 0.5% to 0.7% in the March quarter; however, the annual pace declined from 3.3% to 2.9%, its slowest pace since late 2021. With both headline and core inflation sitting within the RBA's 2-3% target band, the Monetary Policy Board cut the cash rate by 25bps to 3.85% at its May meeting. 

Slowing services inflation was a key factor behind the easing in core inflation. Services inflation softened from 4.3% to 3.7% year-on-year in the March quarter, its slowest pace since the middle of 2022 and well down from its peak of 6.3% reached a year later. These are the signs the RBA has been looking for as it starts to lower rates, with easing services inflation suggesting that some of the more persistent price pressures in the economy have cooled. Meanwhile, goods inflation ticked up from 0.8% to 1.3% year-on-year, though it remains low even compared to 12 months earlier (3.1%) and is just a fraction of its pandemic highs (9.6%).  

Macro (Re)view (25/7) | Uncertainty eases, but for how long?

Uncertainty for markets was, at the margin, lessened by the trade deal struck between the US and Japan this week. The deal has secured a 15% tariff on Japanese imports, down from an initial rate of 25%, while the sectoral tariff on auto imports was lowered from 27.5% to 15%. Japanese equities were the top performer this week adding more than 4% on the back of the deal. The optimism also spilled over to US and Asian equities, reflected also in the cyclical EUR and AUD advancing against the USD. The reprieve may not last long though, with markets waiting on other trade deals ahead of the August 1 deadline. There is also a Fed meeting for markets to navigate as President Trump has continued his criticism of the central bank.    

It was a quiet week in the US with limited data and the Fed in its blackout period ahead of next week's meeting. Trump has maintained his pressure on the Fed to lower rates, but there is next to no chance of that happening next week going by market pricing. A September or December cut is, however, being weighed up. In addition to the Fed meeting, next week sees the August 1 deadline imposed by Washington for trade deals fall and the July nonfarm payrolls report comes through on Friday.  

After delivering 8 rate cuts since June last year - the last 7 coming at consecutive meetings - the ECB left its key rates unchanged this week, with the depo rate - the main rate for monetary policy - held at 2%. With inflation sitting on the 2% target, ECB President Lagarde said in the post-meeting press conference that it was now a 'wait-and-watch situation' for the central bank amid the trade negotiations taking place between the EU and Washington. 

The level of tariffs the US ultimately imposes on European goods and whether or not the EU retaliates bear significant uncertainty over the inflation outlook in the euro area. A strong euro - also a factor for the inflation outlook - is something Lagarde said the ECB was 'monitoring'. But trade is the main game and in the absence of greater clarity here the ECB seems to be at the point where it has taken rates down as far as it is prepared to go. According to a Reuters article quoting ECB sources 'a significant deterioration in growth and inflation' would be needed to unlock further monetary policy easing. Markets price one further 25bps cut by year-end.     

Further insights on the RBA's decision to hold rates steady - against widespread expectations for a 25bps cut - earlier this month came to hand via the meeting minutes and in a speech from Governor Bullock. In the end analysis the Board held the cash rate at 3.85% on the basis that cutting rates for a third time in its past 4 meetings wouldn't have been consistent with either the data or its 'cautious and gradual' to removing policy restriction. Back on decision day, Bullock said the direction was more about timing than direction - and the minutes back that up. 

Key judgements were that rates at their current level were 'modestly restrictive' and that 'all members' agreed that further easing was warranted, based on the inflation outlook. Governor Bullock's speech focused on the dual mandate - 2-3% inflation and full employment - of the RBA, giving fresh insights on the latter. The uptick to 4.3% on the unemployment rate in June does not appear to have perturbed Bullock. While there were signs of easing in the labour market identified from reduced hours, lower job vacancies and less churn from people switching jobs, the RBA's view is that conditions remain on the tight side.