Macro (Re)view (13/6) | US inflation supports Fed cut prospects

Middle East conflict reverberated across markets late in the week putting equities under pressure. The US dollar lifted following Israel's strikes on Iran, suggesting the dollar retains some of its safe-haven status, but it still fell over the week as pricing for further Fed rate cuts was bolstered by soft inflation figures for May. Lower Treasury yields likely also played a role. In light of deficit concerns and policy uncertainty, this week's Treasury auctions drew significant focus. In the event, the auctions generally went better than feared, indicating strong investor demand is still there. That confidence was a factor in Treasury yields falling this week. 

         

US inflation data that showed no discernible tariff-related impacts restored rates pricing for two further rate cuts from the Fed by year-end. Consumer and producer price data underwhelmed expectations this week, with markets expecting the core PCE deflator - the key gauge for Fed policy - to come in at 0.1%m/m and 2.6%yr in May, outcomes seen keeping rate cuts in play. At next week's meeting, the Fed seems likely to remain non-committal. The message from Chair Powell last time was that the pass-through from tariffs to prices is uncertain; the impact could be short-lived, but it could also result in something more persistent. The data has yet to provide a steer. CPI printed at 0.1% month-on-month on both a headline and core basis, cooler than the 0.2% and 0.3% outcomes expected respectively. Annual inflation ticked up from 2.3% to 2.4% headline and the core rate held at 2.8%. Producer prices lifted by just 0.1% month-on-month (vs 0.2%), with the annual rate rising as forecast to 2.6%yr.

A range of soft data points out of the UK indicates the Bank of England's easing cycle has further to run. Monthly GDP figures reported a decline of 0.3% in output in April. This implies a weak start to Q2, though GDP in Q1 was bolstered by tariff front running as US export orders were brought forward. Labour market data was of more concern. Payrolled employment showed its weakest outcome (-109k) since the Covid period, though these reports have been subject to large revisions so the picture may not end up being as downbeat. Wage growth cooled easing to a 5.2%yr pace in May, down from 5.5%.  

In Australia, consumer sentiment showed a slight uptick rising by 0.5% in June; however, it still remains in a range defined as pessimistic according to the Westpac-Melbourne Institute's gauge. Sentiment has been pessimistic since 2022 due mainly to cost-of-living pressures. In May, business conditions tracked in the NAB survey fell to a 4½-year low. Counterintuitively, the confidence measure picked up but remains soft. 

Macro (Re)view (6/6) | Markets push through the noise

Macro developments were largely overshadowed this week by the Trump-Musk split, but despite the noise equities still broadly made ground. An upbeat payrolls report showed the US economy is a long way from being derailed, confidence reflected in the strongest weekly rises in Treasury yields since early April (2s +14bps, 10s +11bps) and a firmer USD across key pairs. The ECB continued its easing cycle with a 25bps cut but is seemingly closer to a pause until more clarity on the global trade situation is at hand; President Lagarde meanwhile said she is going nowhere in response to reports linking her to lead the World Economic Forum. US CPI data (Wednesday) is next week's highlight. 

Solid US payrolls data suggests the labour market is holding up, though it is very early days in the global trade regime shift thrust upon the economy by the Trump administration. Nonfarm payrolls increased by 139k in May, topping the 126k expected outcome and holding the unemployment rate at 4.2%. Average hourly earnings growth firmed from 3.7% to 3.9%yr. There were some caveats: backward revisions lowered payroll gains over March and April by a combined 95k, while the steady unemployment rate came alongside a modest decline in labour force participation from 62.6% to 62.4%. Question marks obviously linger, but the figures saw the swaps market easing back from the two Fed rate cuts that were fully priced in by year-end.   

The 8th cut of the ECB's easing cycle went through this week, seeing its 3 policy rates lowered by 25bps, with the main depo rate now at 2.0%. Indications at the press conference and in post-meeting reporting were that a pause is now on the ECB's radar, with rates thought to be around something resembling a neutral level. This drew a modestly hawkish reaction, with the swaps market becoming more confident in the view that the ECB will - on known circumstances - cut just once more this year. President Lagarde said rates were 'well-positioned to navigate the uncertain conditions that will be coming up' as a new set of staff projections trimmed the inflation outlook and left the forecasts for growth largely unchanged. 

Global trade tensions are viewed as disinflationary for the euro area, with weaker oil prices and a stronger euro seeing forecast inflation at or near the ECB's 2% target across the projection horizon: 2% in 2025 (from 2.3%), 1.6% in 2026 (from 1.9%) and 2% in 2027 (unchanged). Core inflation was revised up this year slightly to 2.4% from 2.2% but then falls below target to 1.9% in 2026 and 2027. Trade uncertainty and a higher euro will be a headwind to growth. Subdued growth of 0.9% is expected this year into a very modest lift of 1.1% next year (vs 1.2% previously) and then 1.3% in 2027 (unchanged).

Australia's March quarter national accounts only reaffirmed that momentum in the economy is soft, but more light was shed on the part cautious households are playing. Slowing growth offshore was also seen in Australia as GDP in the March quarter softened to 0.2% from 0.6% in the December quarter, leaving annual growth steady at 1.3% - well below a par pace of something in the vicinity of 2.5%. With public demand - the stronghold for growth in the economy for more than a year - coming off in Q1 (-0.6%), the private sector was left to make the running. 

The main story here is household consumption, which continues to disappoint (0.4%) despite real incomes that are now accelerating with the RBA having turned the tide on inflation - now back in the 2-3% target band. Further rate cuts will be needed and there was no indication from the May meeting minutes that the Board has other ideas. Households are more inclined to save than spend, an understandable response after sentiment took a turn for the worse on the tariff war. The household saving ratio lifted to 5.2%, its highest level since Q3 2022. My In review feature covers the national accounts in detail here.  

Australia's trade surplus narrows to $5.4bn in April

Australia's trade surplus narrowed to $5.4bn in April, a lower-than-expected figure ($6bn) from $6.9bn in March. Exports slowed (-2.4%) after surging at their fastest pace in 3 years in the previous month, partly linked to trade activity brought forward ahead of the US administration's liberation day tariffs. Imports (1.1%) rebounded from a larger fall in March. 

 

The monthly trade surplus narrowed by $1.5bn in April to $5.4bn, averaging $5.1bn across the past 3 months. Cycle peaks were seen around 3 years ago now after commodity prices soared coming out of the pandemic, resulting in export growth far outpacing imports. The trade surplus has come off those highs in the years since as commodity prices have retraced, while spending on imports has held up.   

Monthly exports fell by 2.4% to $44.1bn, a lift of 4% on its level from 12 months prior. The decline was driven by non-rural goods (-2.1%) and non-monetary gold (-17.6%), the latter retracing after US-bound exports were frontloaded into March (25.9%). Weakness in iron ore (-4.7%) and coal (-16.1%) weighed on non-rural goods. Going against the tide, rural goods advanced (9.4%) - their strongest gain in 5 months. 

Import spending lifted by 1.1% to $38.7bn, rebounding from a 2.4% fall in March. Growth over the year was running at a 5.6% pace. Intermediate goods (-5.3%) declined as the value of fuel imports fell due to weaker oil prices but the other major categories rose. Capital goods saw a 7.5% rise boosted by ADP equipment (25%). A 2.8% rise came through in consumption goods with vehicles (6.6%) and clothing and footwear (6.3%) the leading components. 

In review | Australian Q1 GDP: Growth slows as caution rises

The Australian economy expanded by a weaker-than-expected 0.2% in the March quarter, leaving growth through the year unchanged at a sub-par 1.3%. Growth had accelerated (0.6%) in the December quarter but then slowed sharply from the turn of the year. This was partly attributable to the effects of Cyclone Alfred and other adverse weather events but also reflected softer consumption growth as households remained cautious given developments offshore. 

Uncertainty around global trade due to impending tariff announcements by the US administration saw growth across OECD economies slow to 0.1% in the March quarter, the weakest pace since the pandemic. First quarter growth in some countries was juiced up by US export orders that were brought forward to front run tariffs; however, in China - Australia's largest trading partner - growth slowed from 1.6% to 1.2%.

In Australia, a long-standing theme has been that that public demand has been the major driver of economic growth. However, that is beginning to shift. Private demand drove growth for the second quarter in succession, offsetting a contraction in public demand. 

Going forward, there are questions around the durability of the pick-up in private demand. Household sentiment was boosted by the RBA commencing its easing cycle with a 25bps rate cut in February but remains at pessimistic levels. Global trade uncertainty has since seen sentiment fall back, despite a follow-up cut from the RBA in May, and this is also a headwind to the outlook for business investment in an open economy like Australia where trade is a key component.  

There is work to do if economic growth is to meet the RBA's year-end forecast of 2.1%, a task made harder by global growth that is set to come under pressure from trade uncertainty. Further RBA rate cuts will be required and the next meeting on 7-8 July is live. The national accounts continued to imply productivity growth remains weak: GDP per hour worked was down 0.9% through the year, but monetary policy can do little about that. From the RBA's perspective, productivity is relevant for the inflation outlook. Growth in unit labour costs is still elevated (3%Y/Y in real terms), but it is well down from its earlier highs. 

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National Accounts — Q1 | Expenditure: GDP (E) 0.2%q/q, 1.4%Y/Y

Household consumption (0.4%q/q, 0.7%Y/Y) — Cautious households have remained reluctant to spend even as real incomes picked up at their fastest pace over the past year (3.6%) since late 2021. Cost of living and interest rate pressures are still front of mind. The RBA's easing cycle did commence in February, but that will take time to kick households into gear. 

Household consumption growth was softer this quarter at 0.4% (from 0.7%), partly due to the impacts of Cyclone Alfred and other adverse weather events; however, the weak pace of growth through the year at 0.7% speaks to the broader headwinds households have faced. Growth in the consumption basket continues to be led by essentials (0.4%q/q, 1.1%Y/Y), boosted notably this quarter by utilities (10.2%) with electricity rebates rolling off state and federal government books.

 

As mentioned, real incomes are rising solidly, up 1.7% in Q1 to 3.6% year-on-year. Inflation has cooled substantially, returning to the RBA's 2-3% target band in the quarter, and the labour market has remained robust. Incomes in Q1 were further boosted by social assistance support (5.1%) and non-life insurance payments (12.8%) post cyclones and floods, while the RBA's February cut was another support. With income growth outpacing consumption, the household saving ratio climbed 1.3ppts in the quarter to 5.2%, its highest level since Q3 2022. 

Dwelling investment (2.6%q/q, 5.6%Y/Y) — Posted its strongest quarterly rise (2.6%) since Q1 2021 to be up by 5.6% through the year, accelerating from 3.5% previously. Both new home building (2.3%) and renovations (2.9%) contributed to the strong result. But capacity pressures and higher interest rates - both legacies from the pandemic - continue to impact, leaving the level of residential construction activity down on its recent cycle highs from 2018 and 2021.   

Business investment (0.4%q/q, 1.5%Y/Y) — Has slowed sharply amid a cooling domestic demand backdrop and rising uncertainty around the global outlook. A modest increase of 0.4% in the March quarter saw annual growth come in at 1.5%, well down from a 5% pace a year ago. Equipment investment - notably in IT - has come off sharply (-1.4%q/q, -2.6%Y/Y), but non-dwelling construction (1.7%q/q, 2.4%Y/Y) has been supported by mining and renewable energy projects. Intellectual property (0.9%q/q, 7.9%Y/Y) has remained the area of strength.  

Public demand (-0.6%q/q, 3.5%Y/Y) — Down 0.6% in Q1, its first quarterly contraction since Q2 2022 and its weakest outcome stretching back to mid 2014. Annual growth eased from 5.2% to 3.5% but was still comfortably the largest driver of economic growth over the period. Growth in public spending stalled (0%), but that was partly driven by household energy rebates winding down and it remains at elevated levels. Meanwhile, new investment contracted sharply (-2.8%) but the pipeline of projects underway is still sizeable.

Inventories (0.1ppt in Q1, -0.3ppt yr) — Inventory levels increased by around $1.1bn in the quarter adding a modest 0.1ppt to GDP growth. Non-farm inventories were the key driver ($1.8bn) on the back of a build in the mining sector ($1.1bn) as adverse weather delayed shipments to offshore markets.   

Net exports (-0.1ppt in Q1, -0.1ppt yr) — A modest drag on Q1 GDP, not delivering the boost to growth seen in other countries from US-bound exports brought forward to front run the Trump administration's tariffs. Exports were down 0.8% in the quarter (-0.2% Y/Y) on reduced overseas student arrivals and as resources shipments were hampered by adverse weather and high portside inventory levels in China. However, non-monetary gold exports surged, largely driven by the US. Imports fell 0.4%q/q (0.4%Y/Y), their weakest quarterly result since late 2023. A lower Australian dollar weighed on overseas travel (-2.4%) while goods orders also weakened (-0.3%), their 3rd decline in the past 4 quarters.  

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National Accounts — Q1 | Incomes: GDP (I) 0.2%q/q, 1.4%Y/Y 

Incomes rose in the March quarter amid a backdrop of growth in nominal GDP of 1.4%, holding annual growth at 3.7%. The terms of trade were held broadly flat (0.1%) as export prices (2.7%) on the back of higher demand for iron ore, non-monetary gold and rural goods rose at a similar pace to import prices (2.6%), with a weaker Australian dollar playing its part.

Company profits advanced in the quarter, with non-financial corporations up 0.6% and financial corporations posting a 1.9% rise - its fastest quarterly increase in more than 2 years coming despite the RBA's rate cut. Gross mixed income - small company profits - rose 3.2%, posting their strongest back-to-back gains since the pandemic. Over the past year, non-financial corporations (-5.7%), weighed by falling commodity prices hitting the mining sector, have underperformed financial corporations (6.2%) and gross mixed income (5.4%). 

Robust labour market conditions have continued to underpin growth in the compensation of employees, up a further 1.5% in the quarter and 6.5% through the year. Reforms to boost wages growth in the care sectors were a factor in this latest increase. Meanwhile, enterprise agreements boosted pay in some areas of the public sector.  

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National Accounts — Q1 | Production: GDP (P) 0.2%q/q, 1.2%Y/Y

By industry, the services sectors made the strongest contributions to growth amid mixed outcomes in goods-related sectors. Business services advanced 0.7% in the quarter, as telecommunications (2.1%) and finance and insurance (0.8%) led the way. A 0.7% rise was also seen across household services. The key contributors were education and training (1.3%), other (3.6%) and arts and recreation services (0.9%). 

Turning to the goods sectors, weakness was driven by mining (-2%) as output was hampered by Cyclone Zelia in Western Australia and wet weather in Queensland. Manufacturing (-0.7%) was also weak where disruptions at oil refineries were a factor. Areas of strength were in construction (0.8%) and wholesale trade (1.0%), the latter supported by vehicle demand.   

Australian GDP growth slows to 0.2% in Q1

Momentum in the Australian economy remained soft through the opening months of 2025, with real GDP growth slowing more sharply than expected to 0.2% in the March quarter (vs 0.4% forecast) from 0.6% in the December quarter. Cyclone Alfred and other adverse weather events played a role, but year-ended growth is well under par holding steady at 1.3%. The economy has work to do if growth is to pick up as the RBA forecasts to 2.1% by year-end and keep a slowdown at bay as the effects of the US administration's tariff policies start to bite offshore. Domestically, there are emerging signs that the hand-off from the public sector - the mainstay of growth since the middle of 2023 - to the private sector is starting to get going, the latter driving growth for the second quarter in succession. But further RBA rate cuts will be needed with households still being kept quiet by the earlier headwinds of the tightening cycle and cost-of-living pressures.

Growth in the March quarter was driven by private demand, offsetting a contraction in public demand. This is partly a statistically driven shift due to government electricity rebates wearing off: household spending on electricity is now rising while government spending on the rebates is falling. Nonetheless, household consumption (0.4%), dwelling investment (2.6%) and business investment (0.4%) all contributed to growth in Q1.   

In addition to public demand, net exports weighed on growth. Trade activity to front run the US administration's tariffs announced on April 2 had limited effect on Australia's exports at the headline level - a different story to other countries where growth has been boosted by a surge in US-bound exports.  

The main story remains around households. The dynamics continue to improve: real incomes rose 3.6% over the year - their fastest pace in more than 3 years - the labour market remains resilient, and the RBA started to lower rates in Q1; but households have been slow to respond as consumption growth was clocked at a very subdued 0.4% pace in the quarter and 0.7% through the year. Households are clearly cautious given the uncertain economic outlook, reflected in the saving ratio rising from 3.9% to 5.2% - its highest level since Q3 2022. 

More to come. 

Australian Q1 GDP inputs

Data for the March quarter published by the ABS this morning points to a soft GDP growth outcome in Australia to start 2025. Weak inputs from the business, government and external sectors will likely see estimates for March quarter growth revised lower from the current expectation of around 0.4% going into tomorrow's National Accounts. 

The Trump administration's liberation day tariffs juiced up growth in many countries in the March quarter as export orders to the US were brought forward ahead of the April 2 announcements. Australia was not one of these countries, though non-monetary gold exports did surge to record highs as US-bound orders in the quarter eclipsed their total from the previous four years. But, overall, both export (-0.8%) and import volumes (-0.4%) fell in the quarter, with the ABS estimating that net exports deducted slightly from GDP growth (0.1ppt) in Q1.   

Global trade uncertainty has led to volatility in inventories, but again Australia did not see any major shift. Inventories overall lifted by 0.8% in the quarter and look like adding very modestly (0.1-0.2ppt) to GDP growth.  

Australian business conditions have been soft amid the uncertainty from offshore and from households that have been kept quiet by cost-of-living pressures and higher interest rates. Sales volumes contracted in Q1 (0.1%) in the March quarter; however, much of that was driven by the mining sector (-3.4%). Still, sales growth across the non-mining sector is running at a subdued pace, up 0.4% in the quarter and 1.2% through the year. 

Business profits have faced a range of headwinds from weaker demand, rising costs and declining commodity prices. The latest figures continue to reflect these dynamics. Profits were down 0.5% in the March quarter (-0.9% if adjusted for inventory valuation changes) contracting by 5% through the year. As with sales, the weakness centres in the mining sector where falling commodity prices have taken profits lower (-6%q/q, -19.2%Y/Y). By contrast, profits in the non-mining sector remained on the rise with a lift of 3.1% in Q1 (6.2%Y/Y). A resilient non-mining sector continues to support the labour market; the wages bill was up 1.4% in the latest quarter and 5.7% over the year. 

Public demand has been the stronghold for growth for well over a year, bolstering the economy from weakness in private consumption and investment. However, the momentum from public demand ran out of steam in the March quarter, declining by 0.5% and likely to deduct in the order of 0.2ppt from GDP growth. Government spending (in real terms) was flat in the March quarter, indicating that recovery spending from Cyclone Alfred (early March) has yet to show up. Meanwhile, public investment - despite a large pipeline of activity - took a step back in the quarter (-2.3%).