Progress towards the agreement of a 6o-day extension to the ceasefire in the Middle East that also allows for the reopening of the Strait of Hormuz helped support broader risk sentiment this week. WTI crude futures (June) closed the week below US$90/bbl, a low since mid April. Increasing optimism towards a more concrete de-escalation has helped the USD rise by around 1% over the month of May. Bond yields continued to decline this week.
In Australia, RBA rate-hike pricing eased further as household spending and inflation data surprised to the downside in April, adding to last week's soft labour force report. Markets are now weighing up whether the RBA will hike the cash rate (4.35%) again this cycle, having previously priced the key rate rising as high as 4.85% only a few weeks ago. Household spending declined by 1.1% in April, its weakest month since late 2023. This was heavily impacted by transport-related spending (-4.7%), reflecting signs of demand destruction in travel and tourism due to higher airfare costs (see here).
Households, however, received some respite as the cut to the fuel excise tax from April 1 saw fuel prices (excluding diesel) fall between 9-10% compared to March. That was the key factor as headline CPI slowed from 4.6% to 4.2%yr (see here). Next week's National Accounts will provide a snapshot of conditions prior to the Middle East conflict. Although the conflict impacted sentiment, GDP growth is likely to have been relatively unscathed, partly during to surging tech-related capex (see here). My preview of the March quarter National Accounts is available here.
The outlook for US rates to remain on hold was largely unaffected by a slightly below consensus print for the core PCE deflator - the key inflation gauge for the Fed - in April. Core PCE inflation rose 0.2%m/m, its slowest increase in 5 months, but the annual pace lifted from 3.2% to 3.3% - remaining well above the 2% target. Historically weak consumer sentiment - not always reliably correlated with spending - could be weighing at the margin. Personal spending slowed to a 0.5% rise in April, halving from the prior month and was broadly flat (0.1%) in real terms. The energy shock is squeezing real incomes again, with households likely moderating consumption. The key to the outlook is likely to come down to the duration of the shock.
In Europe, the ECB's account of the April meeting gave every indication the Governing Council is on track to hike in June, reaffirming market pricing. Key lines were that officials judged that 'maintaining price stability might necessitate tighter monetary policy' and that the main focus was shifting towards 'the most appropriate timing for a rate increase'. The BoE in the UK is taking a more cautious approach, given concerns over the labour market. A speech from Governor Bailey noted that tolerating above target inflation was a justifiable trade-off amid uncertainty over the conflict and economic weakness. That tolerance, Bailey noted, would wear thin if signs of second-round effects on prices and wages more broadly emerged.
