Macro (Re)view (18/7) | USD finds momentum

The US dollar climbed this week, overcoming an earlier fall on reports President Trump was on the verge of removing Fed Chair Jay Powell. The incoming data drove the dollar higher as Fed rate-cut pricing was reduced, markets now struggling to see the Fed delivering more than one further cut by year-end. Amid a stronger dollar, the local Australian dollar underperformed on the back of weak labour market data, amplifying pressure on the RBA following its surprise decision last week to hold rates unchanged. Equities mostly advanced but were patchy in Europe. Concerns around increased supply from fiscal deficits were again in the news - this time in Japan - but bond markets were not a source of cross-market volatility this week. 

Signs of tariff-driven inflation were limited in this week's US CPI data. Headline CPI printed 0.3%m/m and 2.7%yr, a touch more than expected (2.6%) and up from 2.4% prior. But that was offset by core CPI (ex-food and fuel) that came in at 0.2%m/m, the 5th consecutive below consensus outcome. The annual pace firmed from 2.8% to 2.9%, in line with forecasts. Tariff-relevant effects were seen in areas such as fresh fruit and vegetables (1%) and household appliances (1.9%), but their overall contribution to monthly inflation was modest. In addition to the CPI report, both producer (2.3%yr) and import prices (-0.2%Y/Y) indicated that tariffs have yet to meaningfully affect pricing decisions.

Meanwhile, some positive data around the US consumer came from retail sales that surprised to the upside in June. Headline sales advanced 0.6%m/m (vs 0.1%), rebounding from May's 0.9% decline. That was backed up by the control group - widely touted as a better guide of the momentum in spending - lifting by a stronger-than-expected 0.5%m/m (vs 0.3%).               

UK inflation and labour market data reaffirmed the Bank of England will likely retain its 'gradual and careful' approach to its easing cycle. Upside prints revealed some of the inflation risk the BoE has been wary of as headline CPI in June lifted from 3.4% to 3.6%yr (vs 3.4%), while the core rate nudged up from 3.5% to 3.7%yr (vs 3.5%). Inflation well above the BoE's 2% target is to a large extent due to elevated inflation in services prices. On the latest read, services inflation was 4.7%yr, an unchanged pace from May but defying expectations to ease to 4.5%. Services inflation is proving sticky and is unlikely to slow materially near term, with many prices in this part of the basket government-regulated and only resetting annually or infrequently. The BoE has therefore been looking closely at the labour market as a gauge on the underlying pulse of services inflation. 

The labour market is clearly cooling, but with well documented quality-related issues continuing to plague the data the BoE is going by feel. The figures that were reported showed the unemployment rate rising from 4.6% to 4.7% in May, coming on the back of a 41k fall in payrolled employment. But the drop in employment is likely to be subject to a significant revision; this week's data revised the 109k fall in employment initially reported in April to a much smaller decline of 25k. Perhaps the cleanest read on conditions is coming from earnings growth, which (excluding bonuses) slowed to an annualised pace of 5% from 5.3% previously, consistent with a softening labour market. 

Next week's ECB meeting shapes as a case of steady as it goes. Downside risks to the economic outlook in the euro area are building but the expectation is the ECB will leave policy on hold. The threat of a 30% tariff hangs over European goods entering the US, unless the Trump administration and the EU can come to terms by August 1. The ECB can only set policy to what is announced, so it is waiting to see how the situation evolves, and the extent of any countermeasures that may follow. Expect the strength of the euro to be a key focus at the meeting. Typically, the ECB avoids commenting on the level of the exchange rate, but this has increasingly been a source of focus for officials from the central bank, posing downside risks to growth and inflation.   

In Australia, the unemployment rate was reported to have lifted to 4.3% in June, its highest level since late 2021 after 5 consecutive months at 4.1% (reviewed here). Higher unemployment reflects the impact of employment growth slowing - not falling - with labour force participation (67.1%) around record highs. Employment put in its second consecutive flat outcome lifting by just 2k in June (vs 20k expected) after a 1.1k decline in May. Signs of softening in the labour market - if sustained - would present a strong challenge to the RBA's patient stance on rate cuts. An August RBA rate cut that the Board had seemingly tied to the June quarter inflation data looks even more likely now.

Australian employment 2k in June; unemployment rate 4.3%

Australia's unemployment rate has lifted to its highest level since November 2021, rising to 4.3% in June from the 4.1% level it had held since the start of the year. Today's poor report is untimely for an RBA that resisted widespread calls to cut rates earlier this month. Market reaction on the figure was strong ($AUDUSD -0.5%, 3-year yield -9bps) as the swaps market locked in a rate cut for the next meeting in August. While this RBA has shown it will move independently of market pricing, signs of softening in the labour market puts a different complexion on its disposition to wait for the quarterly inflation data due later this month. 

By the numbers | June

• Employment increased by a modest 2k in June (full time -38.2k/part time 40.2k), well short of the 20k rise anticipated. The decline in employment in May was revised to a smaller fall of -1.1k from -2.5k previously. 
• The unemployment rate rose to 4.3% against expectations for it to hold at 4.1%. With underemployment also ticking up from 5.9% to 6%, total labour force underutilisation increased from 10% to 10.3%. 
• Labour force participation returned to 67.1% from 67%, reversing its decline from last month. The employment to population ratio was steady at 64.2%. 
• Hours worked fell sharply by 0.9% on the month, slowing annual growth from 3.1% to 1.8%.  

The details | June 

There are signs that employment is cooling, with a net 2k rise in June (FT -38.2k/PT 40.2k) coming on the back of a 1.1k fall in May. Employment figures have been hugely volatile this year, but today's report makes it soft outcomes in back-to-back months.

The overall picture on employment is still solid: employment increased by 86.4k for the June quarter - its strongest quarterly rise since Q3 last year - and gains in the period averaged out at a decent run rate of 28.8k per month. But with all the heavy lifting on employment having been done in April (85.5k), the slowdown in May-June is worth exploring. 

Developments such as the announcement of the Trump Administration's tariff regime and the federal election domestically may have led to more caution around hiring than earlier thought. An alternative viewpoint is that hiring in the non-market (government) sector may be slowing, the segment that has kept employment well supported amid the slower growth backdrop in Australia - but the federal election may have also played a role here.  

Although there is a lot of uncertainty around the dynamics, slower employment means the unemployment rate has started to move up. A fall in participation prevented the unemployment rate from creeping higher last month, but with participation going on to rebound to 67.1% in June the unemployment rate shot up to 4.3%, a 43-month high. Unemployment averaged 4.2% across the June quarter - still a low level - and the averages of the broader measures of underemployment (6%) and underutilisation (10.1%) were also low. Slower employment, if sustained, will see these measures loosen, so this will need to be monitored. 

Hours worked have swung around with the volatility in employment. In June hours worked were down 0.9% on the month; however, hours worked lifted by 0.4% in the quarter - a little below the increase in employment (0.6%). 

In summary | June  

Robust labour market conditions played a key role in the RBA's decision to hold rates steady at last week's meeting, with the Board signalling its preference to wait for the quarterly inflation data. But given today's report where question marks have emerged around the labour market, that narrative seems much less likely to survive the RBA's next meeting in August - even if inflation shows a little less progress than desired. 

Preview: Labour Force Survey — June

Australia's labour force survey for June is due from the ABS this morning (1130 AEDT). Robust labour market conditions were a key factor in the RBA's decision to hold rates unchanged earlier this month against widespread expectations for a cut. Although recent monthly employment outcomes have been volatile, the unemployment rate has held at the historically low level of 4.1% for the past 5 months alongside labour force participation around record highs. Governor Bullock said following the decision that the RBA was taking a cautious and gradual approach to the easing cycle and that it would be closely watching the data, including today's labour market report. 

June preview: Anything goes 

Expectations are set modestly for today's report that shapes as another wildcard. Employment is forecast to rise by 20k, rebounding a 2.5k fall last time out in May. This would see the unemployment rate holding at 4.1%, based on an unchanged participation rate of 67%. As the chart below shows, employment (green line) has been highly volatile in recent months, so markets will be giving little weight to the expected figure of 20k. 

The unemployment rate will be of much greater importance. Any uptick from 4.1% could drive a reaction (weaker AUD and lower yields) on the basis that signs of labour market softning could be enough to nudge a reluctant RBA into cutting rates. Conversely, a steady or lower unemployment rate could see the odds for an August RBA rate cut (90%) pared back.   

May recap: Employment falters with surprise fall 

Employment faltered in May declining by 2.5k on net (full time 38.7k/part time -41.1k), disappointing expectations for a 21.5k rise that looked to be well in hand after April's strong increase (87.6k). The decline in May is more likely symptomatic of the recent volatility in employment outcomes rather than a deterioration in the underlying labour market conditions.

Speaking to that point, the unemployment rate has remained low and steady in 2025, printing at 4.1% for 5 months in succession. If anything, declines in the underemployment rate from 6% to 5.9% and in total underutilisation from 10.1% to 9.9% suggested the labour market tightened a little in May. While an easing in the participation rate from 67.1% to 67% assisted in holding unemployment steady - even with employment falling - the participation rate is still elevated and stands near record highs. 

Hours worked also defied the fall in employment to rise strongly by 1.3% on the month, with base effects accelerating annual growth from 1.1% to 3.1%. Hours rising in May appeared to be a catch up from the month prior following the surge in employment. 

Macro (Re)view (11/7) | The tariffs are in the mail

The conclusion of the initial 90-day extension to the Trump administration's tariff regime has seen a further delay, pushed back to August 1. According to AP News, Trump sent letters to 23 countries outlining the tariff rates that will be imposed unless a trade deal can be negotiated by that date. While uncertainty continues to linger this gave markets a little more breathing room. US equities came off slightly for the week but remain around record highs, while indices in Europe and most of Asia advanced. Tariffs have been a US dollar negative but not on this occasion as the US dollar ended the week higher on the major crosses. Global bond yields lifted, the move a bit higher in Australia after the RBA's surprise decision to leave rates on hold.   

Federal Reserve policymakers were prepared to bide their time leaving rates on hold last month (4.25-4.5%) with tariff-related uncertainty clouding the economic outlook, the June meeting minutes showed. Judging that the economy and the labour market were still in solid shape - with interest rates 'moderately or modestly restrictive' - the FOMC concluded that it was 'well positioned' to respond to the uncertainties that lay ahead. That was the collective view; however, individual interpretations within the FOMC vary significantly. 

A couple of members (Waller and Bowman) have said they are prepared to back a cut at the next meeting (July 29-30); other members lean towards cutting but not next time; and some see no more cuts this year. The various views on policy reflect differing outlooks for the economy, but ultimately the data will steer policy for an FOMC taking more of a reactive stance. The key concerns for the FOMC is that the prevailing uncertainty will weigh on investment and hiring decisions of firms, and for households - depending on how tariffs pass through to prices - spending could be affected disproportionately across the income distribution.

The EU, currently in negotiations with the Trump administration, is reportedly not expecting to a receive a tariff letter, but the situation is very fluid. Markets continue to lean to a September rate cut from the ECB to support the economy amid the uncertainty. Data this week showed that weak sentiment may be weighing on households. Retail sales for May posted a 0.7% decline, with annual growth sliding from 2.7% to 1.8%.    

A cautious RBA surprised with its decision to hold the cash rate at 3.85%, going against market pricing that had nearly fully discounted a 25bps cut (reviewed here). A preference to wait for more comprehensive quarterly CPI data as opposed to the higher frequency (but less detailed) monthly CPI indicator was behind the decision. The RBA wants more assurance that inflation is on track to fall closer the midpoint of the 2-3% target band and stay there before it cuts again. 

Cuts again is the key point because RBA Governor Bullock said in the post-meeting press conference that this week's decision was about 'timing rather than direction'. The 9-member policy Board voted 6-3 to hold, so only a modest shift in the vote pattern will be needed to swing the majority to a cut at the next meeting on August 11-12. By then the RBA should have sufficient information to justify a cut, including the quarterly CPI report for Q2, a new set of economic forecasts and additional information on the labour market. 

RBA defies cut expectations with July hold

The RBA held the cash rate unchanged at 3.85% at today's meeting, as a 6-3 majority on the Monetary Policy Board defied widespread expectations for a 25bps rate cut. The surprise decision forced markets to backpedal, the Australian dollar traded nearly as high as US$0.6550 from $0.6510 pre meeting and a sell-off in the bond market drove the 3-year yield 11bps higher to 3.4% by the close. Having already eased by 50bps with cuts in February and May, Governor Bullock said the Board was maintaining a 'cautious, gradual approach' and today's hold was about 'timing rather than direction'. The Board will await more information - including the June quarter CPI report (due July 30) and new RBA staff forecasts - to confirm that inflation is on track to hold at the midpoint of the 2-3% target band before moving again. The next cut looks likely to come in August - but as today showed, nothing can be assured.  

Markets were expecting a cut today only to be surprised as the RBA took a different view on the data and its policy guidance. The misalignment in views only increased as today's meeting drew nearer, largely because a void of policy-relevant speeches or appearances from RBA officials had left expectations for a cut to climb unchecked. At the post-meeting press conference, Governor Bullock pushed back on that version of events, saying that it would not have been appropriate for the RBA to guide markets prior to a meeting. But today's situation is clearly unhelpful to a newly formed Board and to an RBA that has worked to revamp its communications following the review into the central bank.  

Today's decision statement effectively revealed that little had changed for the Board since the May meeting. The labour market remains in robust shape, with the Board continuing to judge that conditions are tight. Although economic growth was subdued in the March quarter (0.2%q/q, 1.4%Y/Y), the Board did not see that as posing an increased risk to the expected pick-up in household consumption. Neither was it convinced by the slowing in inflation (2.1%yr headline, 2.4% core) in the monthly CPI gauge for May. In fact, Bullock pointed to upside risks to inflation from the monthly indicator, citing home building and durable goods prices. When it comes to inflation, the line has basically been drawn in the sand that it is only the quarterly CPI reports that the Board is prepared to move on. Further to that, Bullock said the Board will look to the Q2 CPI report to confirm that inflation is falling in line with its forecasts. Should that be the case, a cut is likely on the cards for August. 

Events offshore around global trade were still considered highly uncertain, a key factor giving the Board reason to pause. The RBA expects global growth will be weaker due to the US administration's tariff agenda. In an Australian context, the spillover effects on household spending and business investment are what the RBA is waiting to gain greater clarity on. The next RBA monetary policy meeting is on 11-12 August. 

Preview: RBA July Meeting

Receding inflation risks and a fragile household sector have a 25bps rate cut from the RBA firmly in the frame for today's meeting (decision due 1430 AEST). Markets price a 25bps cut in the cash rate from 3.85% to 3.60% as a near lock, with two further cuts discounted by year-end. After the first two cuts of the easing cycle in February and May were separated by a pause in April, the expectation is that slowing inflation and subdued economic growth has opened the door to back-to-back cuts. However, the labour market remains robust, with solid momentum in employment keeping the unemployment rate low at 4.1%. 

The RBA's last rate cut in May was dovish beyond the decision itself and largely set the stage for a follow-up move today. The Board elected to cut by 25bps but the surprise revelation came from Governor Bullock at the post-meeting press conference that a larger 50bps cut had been discussed. The uncertainty around global trade in response to the US Administration's tariff regime was a clear factor, but the meeting minutes would later reveal that the Board concluded that domestic conditions 'could, on their own, justify some degree of reduction in the cash rate'. 

New forecasts published by the RBA at the May meeting downgraded the outlook for the Australian economy. Forecast GDP growth (in year-ended terms) was lowered from 2.4% to 2.1% this year and from 2.3% to 2.2% in 2026. Risks to this outlook appear to be to the downside after a soft March quarter where GDP growth came in at just 0.2% quarter-on-quarter and 1.3% year-on-year. For growth to pick up as the RBA expects, the household sector will be key. But consumption growth was tracking at a weak pace (0.4%q/q, 0.7%Y/Y), a clear sign that the RBA will need to continue dialing back policy restriction. 

Inflation is not standing in the way of further RBA cuts. In the March quarter, inflation returned to the 2-3% target band on both a headline (2.4%) and core basis (2.9%). This led the RBA to lower its projections, with core inflation now seen tracking nearer to the midpoint of the band at 2.6% across the forecast horizon out to mid 2027. May's reading of the monthly CPI gauge suggests that inflation has continued to cool since the end of the March quarter. Headline inflation was pressing the bottom end of the band slowing from 2.4% to 2.1%yr while core inflation eased from 2.8% to 2.4%yr.

Macro (Re)view (4/7) | United front from central banking chiefs

It was tougher going for risk assets this week as the outlook for Fed easing was pared back and fiscal and deficit concerns returned to the fray. It was a united front from central bank chiefs at the ECB's Sintra Forum as the keynote panel, which included Fed Chair Powell, indicated patience was the optimal policy approach at present. After a strong US employment report markets now price just 2 cuts from the Fed by year-end, giving little chance to a 3rd cut that was previously seen as a 50/50 prospect. Adding upward pressure to Treasury yields was the passage of President Trump's fiscal bill, estimated to add $3.4tn to the US deficit over the coming decade. In the UK the gilt market sold off due to renewed concerns over debt sustainability, but this was tempered by comments from BoE Governor Bailey hinting that the pace of quantitative tightening could slow.   

A robust US employment report broadly validates the Fed's patient stance amid rising pressure from President Trump to lower rates. Nonfarm payrolls rose by 147k in June, an upside surprise on the 106k consensus. This saw the unemployment rate fall from 4.2% to 4.1%, defying an expected drift up to 4.3%. A slight fall in participation (62.3% from 62.4%) was a factor behind the lower unemployment rate, but employment growth is still tracking at solid pace deep into the post-pandemic cycle, averaging 150k over the past 3 months. Meanwhile, average hourly earnings growth eased from 3.9% to 3.7%, indicating that while conditions are robust tariffs rather than the labour market pose more of an inflationary risk going forward. 

ECB President Lagarde reaffirmed this week in Sintra that policy is in 'a good place', a signal heeded by markets that are not discounting the next rate cut until December. Lagarde, speaking to outline the findings of the ECB's strategy review, said the Governing Council will deliver 'appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the (2%) target in either direction'. Data this week showed euro area inflation sits at 2% on a headline basis as of June, firming from 1.9% on the back of higher energy prices. Core inflation was unchanged at 2.3%yr.  

An underwhelming 0.2% rise in retail sales for May reiterated Australian households remain under pressure, firming expectations for the RBA to continue its easing cycle at next week's meeting. Deferred winter clothing sales were the only thing that saw retail sales hold up against declines in most other categories (see here). Sentiment is weak and households are cautious. There are enough signs for the RBA to reach the conclusion that the expected rebound in household consumption is at risk of falling behind the curve without additional support. 

The RBA's two earlier rate cuts came in February and May, following the quarterly inflation reports. But as covered last week, the RBA will probably have enough conviction in the disinflationary process to make an earlier move after headline and core CPI slowed sharply in May to 2.1%yr and 2.4%yr respectively in the ABS's monthly gauge. In other news from Australia, national dwelling approvals stemmed a run of declines with a 3.2% rise in May (see here); while the trade surplus halved to $2.2bn in May after imports accelerated at their fastest pace for the year and exports declined, with US-bound exports retracing the month after the announcement of the administration's liberation day tariffs (see here).  

Australia's trade surplus narrows to 4½-year low in May

Australia's trade surplus halved in May to $2.2bn, its narrowest since August 2020 - defying expectations to come in at $5bn. The surplus fell from $4.9bn in April, revised down from an initial estimate of $5.4bn. Imports (3.8%) lifted at their fastest pace since last December as exports (-2.7%) declined for the third time in the past 4 months. US-bound exports normalised the month following the Trump administration's liberation day tariff announcements.   

The trade surplus narrowed sharply from $4.9bn in April to $2.2bn in May, its lowest level going back to the early days of the pandemic in August 2020. The narrowing came on the back of a decline in exports (-2.7%) and a rise in imports (3.8%), the latter posting its fastest uplift of the year. Across the past 3 months, the trade surplus averaged $4.4bn. 

Exports were down 2.7% for the month in May coming in at $42.4bn, turning annual growth negative to -1.6% from 2.2% prior. Declines in the month were seen across all major categories: rural goods -3.5%, non-rural goods -2.4% and non-monetary gold -3.4%. Non-rural goods saw their 4th fall of the past 5 months, with LNG (-11.5%) and coal (-2%) driving the weakness in May. Meat (-15.7%) and wool exports (-16.5%) hit the rural goods category.  

After surging to front run the Trump Administration's new tariff regime, exports bound for the US retraced to around $2bn in May having touched as high as $6bn in January.   

Import spending lifted by 3.8% in May, rising through $40bn to a new record high. Annual growth increased from 5.5% to 6.9%. Capital goods were the key driver surging by 8.6% coming off a similar gain in April (8.5%). Meanwhile, consumption goods were up by 3%, underpinned by a strong rise in vehicle imports (7.9%). Intermediate goods (1.8%) rose for the first time in 4 months, with the falling value of fuel imports being a major driver of that weakness.  

Australian dwelling approvals rise 3.2% in May

Australia's dwelling approvals series lifted for the first time since the opening month of 2025 rising by 3.2% in May, a slight miss on consensus for a 4% increase. The gain was led by a 9% surge in the unit or higher-density segment, but that only partly reversed recent weakness. House approvals were broadly flat on the prior month's total. Approvals remain at historically low levels, a legacy of the RBA's earlier tightening cycle and pandemic-related supply constraints in the construction sector.  

Headline dwelling approvals saw a 3.2% lift to 15.2k in May, the first gain in the series in 4 months. This turned the tide somewhat on a run of declines through the past 3 months: February -1.2%, March -7.1% and April -4.1%, and left approvals up 6.5% on a year ago. Nonetheless, approvals are well contained and are more than one-third below their 2021 cycle peak (22.9k). 

In May, higher-density approvals were up 9% to 5.7k. After starting 2025 with a large 15.7% rise, approvals in the segment went onto fall by 30% across the February-April period. This weakness was centred mainly in high-rise approvals in Sydney and Melbourne. Other higher-density approval types (low-rise and townhouses) look to have been holding up against the high-rise weakness. 

House approvals were broadly unchanged in May at a tick over 9.5k, a level 3.2% higher than 12 months ago. Approvals in this segment have remained in a tight range for over a year, showing little sign of breaking to the upside. The RBA's easing cycle - set to continue next week - may be the catalyst required.     

Australian retail sales up 0.2% in May

Australian retail sales rose 0.2% for May, an underwhelming outcome relative to expectations (0.5%) coming off a flat month in April (revised from -0.1%). Sales were driven by the fastest rise in the clothing and footwear category since early last year (2.6%) after households had deferred winter clothing purchases. This offset weakness across other categories, but momentum in retail sales is weak as cautious households remain reluctant to spend. The report adds to the case for the RBA to lower rates next week.     

National retail sales lifted by 0.2% month-on-month in May to $37.3bn, the level up 3.3% on 12 months ago but down from a 3.8% pace last month. Although inflation has eased significantly and the RBA has cut rates twice this year, the higher cost of living and weak sentiment have been keeping households quiet. Sales growth has averaged just 0.1% across the past 3 months.  

At the category level, clothing and footwear sales accelerated by 2.9% in the month - its strongest rise since February 2024 - after warmer weather saw households delaying winter clothing purchases. This had the effect of holding up headline sales growth against outcomes that were either flat or negative in the other categories (see table above). It also led discretionary sales (0.6%) to post their fastest rise in 6 months. But, overall, this was a weak report consistent with households remaining constrained.    

Sales growth across the states has been volatile month to month in 2025, as shown in the chart below. In the two largest states of New South Wales and Victoria, sales were up 0.1% and 0.2% respectively - very modest rebounds in the context of their declines in April (NSW -1% and Victoria -0.4%). Sales in Queensland stabilised (0.1%) from the post-cyclone rebound in April. Meanwhile, sales momentum in Western Australia remains the strongest of all states rising by a further 0.7% in May, their 7th consecutive rise.