Macro (Re)view (27/6) | US equities to new highs

Easing concerns around trade and geopolitics and a dovish repricing of the Fed outlook saw investors sending US equities to record highs and unlocked more downside in the USD to lows since 2022. As a result, the AUDUSD north of 0.65 is trading on its highs for the year - despite rising expectations for RBA easing - while the EURUSD through 1.17 is at levels last cleared in 2021. Euro appreciation could extend the ECB's easing cycle, though President Lagarde remained non-committal in her latest remarks to the EU Parliament. The weaker USD looks partly fundamental and partly sentiment driven. Lower treasury yields led by the front end reflect the fundamentals, with a case for Fed cuts building around weaking consumer demand. On the sentiment side, a WSJ report that President Trump may accelerate the timeline to announce a successor to Fed Chair Powell due to dissatisfaction over the Fed's patient approach to easing was a key factor. 

Inflationary concerns from the impact of tariffs are keeping the Fed on hold for now but markets are increasingly confident that US monetary policy is too restrictive, pricing in 3 cuts by year-end. Fed Chair Powell held a cautious line in front of Congress this week reiterating that policy was "well positioned" and would be guided by the incoming data. The fact that the Fed's preferred inflation measure - the core PCE deflator - lifted from 2.3% to 2.7%yr in May - above expectations and only just after the liberation day tariffs were announced - speaks to Chair Powell's messaging. 

But some Fed members (Waller and Bowman) have been vocal in disagreeing with that stance and lean towards cutting rates. The case for rate cuts is supported by signs of weakness in demand. March quarter GDP growth was revised from -0.2% to -0.5% (annualised) on the back of a sizeable downgrade to personal consumption growth (0.5% from 1.2%). This was followed up by a 0.3% contraction in real spending in May, pointing to increased caution from households.  

Swaps pricing for an RBA rate cut in July has firmed to a near-lock (90%) after Australian inflation data for May cooled sharply. A total of 3 rate cuts are priced into the curve by year-end, which would bring the cash rate down to 3.1% from 3.85% currently. The central narrative is that constrained households will require more support if they are to underpin the pick-up in economic growth the RBA has forecast. Disinflationary progress gives the RBA scope to ease with the labour market still strong. This week, job vacancies were reported to have lifted by 2.9% for the 3 months to May to stand at 339k or 2.2% of the labour force - elevated levels however measured. 

Headline inflation meanwhile has fallen to the bottom of the RBA's 2-3% target band printing at 2.1% in May from 2.4%yr in April, undershooting expectations to remain unchanged. Price declines in volatile items (fuel, fruit and holiday travel) were key drivers, but price pressures are also easing more broadly across the basket. This was reflected in core or trimmed mean inflation slowing from 2.8% to 2.4%yr, with services inflation down from 4.1% to 3.3%yr - both measures now at their weakest pace in at least 3 years. My review of the May inflation report has more detail here. 

Australian CPI slows to 2.1% in May

Australian inflation has continued to cool, validating the near 80% chance markets have assigned to an RBA rate cut in July. Headline CPI inflation is now pressing the lower end of the RBA's target range after slowing to 2.1%yr in May - well below the 2.4% outcome expected and its slowest pace in 7 months. This was backed up by core inflation (2.4%) that is a tick below the midpoint of the band and services inflation (3.3%) running at a 3-year low.  

The ABS's monthly CPI gauge clocked prices falling by 0.4% in May. This was the weakest outcome in 2 years, lowering the annual rate from 2.4% to 2.1%. Price declines in key items including fruit (-2.7%), fuel (-2.9%) and holiday travel (domestic -9.2% and international -4.8%) contributed heavily to inflation falling in May. 

Electricity prices have been pushing up on inflation over recent months as the effect of government rebates has been winding down. This continued in May as electricity prices rose by 2%. The ABS highlighted that most households in Victoria received only one installment of the Federal government's rebate in May (compared to two for households billed in April), and this was a key driver of the latest increase. Nonetheless, electricity prices were still 5.9% lower than 12 months prior. Since coming into effect in mid 2023, the ABS estimates the rebates have spared households from a 17.7% rise in electricity prices over the period, with retail prices instead rising by just 1.1%. 

 

Being the middle month of the quarter, the May report included a broader update of services prices than in April. Encouragingly, inflation in services - the key part of the basket for the RBA - slowed from 4.1% to 3.3%yr, its lowest since May 2022. Aside from holiday travel, sports and cultural services and insurance recorded declines in May's update, weighing on services inflation. Goods inflation remained low at 1%yr.    

Overall, the key takeaway from today's report is that inflation is slowing broadly across the basket. The various measures of underlying inflation slowed in May to sit at or near the midpoint of the RBA's band: trimmed mean 2.8% to 2.4%yr; CPI ex-volatile items 2.9% to 2.5%yr; and CPI ex-volatile items and holiday travel down from 2.7% to 2.6%yr (seasonally adjusted). 

Macro (Re)view (20/6) | Fed stays patient

Geopolitics continued to dominate the headlines as markets also worked their way through a raft of central bank meetings. Equities lacked conviction while the US dollar was stronger across the major pairs. US Treasurys found a slight bid. Both the Fed and BoE meetings contained few surprises; at the BoJ policy was on hold and bond purchases are set to slow. In Sweden, the Riksbank cut rates 25bps to 2% as expected, while a return to deflation prompted the SNB to cut by 25bps to 0% on its key rate. 

Solid US economic conditions and a lack of tariff-driven inflation meant the Fed was content to leave rates unchanged in the 4.25-4.5% range this week. The FOMC's updated summary of economic projections contained mixed signals from a policy perspective. The median estimate of individual FOMC members' forecasts still points to a further 50bps of rate cuts this year. But 7 members now see rates staying on hold, up from 4 in the March projections. That hawkish tint partly reflects an uplift in the inflation forecasts on the back of tariffs. Core PCE inflation is seen lifting to 3% this year (from 2.7%) before easing by to 2.4% in 2026 (from 2.2%). However, that comes alongside GDP growth that is expected to be slower at 1.4% in 2025 (from 1.7%) and 1.6% in 2026 (from 1.8%) and unemployment that is higher at 4.5% in 2025 and 2026, up from 4.4% and 4.3% respectively. At the post-meeting press conference, Chair Powell was balanced in his remarks noting that policy was in a good place, able to be adjusted as more clarity comes to light.  

The Bank of England left rates on hold at 4.25% this week in a 6-3 vote. Rates have been cut at a quarterly frequency since August last year, with the BoE sticking to its guidance for a 'gradual and careful' easing cycle. There were no signs that a pivot to a faster pace of easing is being considered. That is despite a series of weak readings on employment and improving inflation data. Headline inflation eased from 3.5% to 3.4%yr in May, a touch above the 3.3% figure expected. However, the core rate met expectations slowing from 3.8% to 3.5%yr, and this was backed up by services inflation that came down from 5.4% to 4.7%, below the 4.8% consensus.  

An unexpected 2.5k decline in Australian employment in May is not cause for the RBA to downgrade its assessment of the labour market, but a July rate cut is now priced above a 75% probability. After surging in April (87.6k), employment was unable to extend higher in May - defying expectations to rise by 21.5k (reviewed here). This was the latest in a series of volatile monthly employment outcomes. For the 3 months through May, employment gains averaged a solid 37k. That underlying momentum has held the unemployment rate low and steady at 4.1% since the start of the year. Meanwhile, the participation rate - although lower in May at 67.0% - is only just off record highs. The labour market has rebalanced from peak tightness, but conditions are still robust. That leans against the consensus view that has built a narrative around the RBA needing to deliver back-to-back cuts following weak GDP growth of 0.2% in Q1. Monthly inflation for May and job vacancies for Q2 are two key data points to watch next week ahead of the RBA meeting on July 7-8.

Australian employment -2.5k in May; unemployment rate 4.1%

Australian employment unexpectedly fell by 2.5k in May, unable to follow on from its largest rise in 14 months in April (87.6k). The unemployment rate still remained at 4.1%, unchanged for the 5th month in succession as the participation rate eased to 67.0%. While underlying labour market conditions are solid, the RBA showed in May it is prepared to lower interest rates. Today's report has given markets no reason to think that the 25bps cut that is largely priced in for the meeting on 7-8 July will not be forthcoming.     

By the numbers | May 

• Employment posted a modest 2.5k decline in May (full time +38.7k/part time -41.1k), missing expectations for a 21.5k rise following April's 87.6k surge (revised from 89k). 
• The national unemployment rate remained unchanged at 4.1%. Underemployment and underutilisation both fell by 0.1ppt to 5.9% and 9.9% respectively, reversing increases from last month.
• Labour force participation declined from 67.1% to 67.0%. The employment to population ratio eased from 64.3% to 64.2%. Both measures are near record highs.  
• Hours worked advanced by 1.3% in the month, its strongest reported increase in 14 months - despite employment falling. Base effects accelerated annual growth from 1.1% to 3.1%. 

The details | May 

Another volatile outcome for employment has been reported in the Labour Force Survey (LFS). On this occasion, employment in May fell by 2.5k - full time employment rose by 38.7k but was offset by a 41.1k fall in part time employment. Although many will argue the LFS is volatile at the best of times, the current situation seems a little more extreme. Through the first 5 months of the year, the LFS has reported both the largest fall in employment since the pandemic (-54.2k in February) and the strongest rise in 14 months (87.6k in April), a time when the unemployment rate was 3.7% - significantly below its current level. Seasonality and a range of other factors (increased retirements and severe weather events) all appear to be contributing to higher volatility in the data. 

Beneath the surface, labour market conditions are solid. Employment gains averaged 36.9k over the 3 months to May, a pace that has held the unemployment rate low and steady at 4.1%. Job vacancy data suggest labour demand is still robust and - barring any unexpected shocks - should be able to sustain employment growth around its current momentum. 

The cleanest indicator of conditions currently is the unemployment rate - which is not always the case with the LFS. Although employment outcomes have swung significantly from one month to the next, the unemployment rate at 4.1% has not moved since the turn of the year. This is a historically low level for the unemployment rate. Additionally, the broader measures of spare capacity of underemployment (5.9%) and underutilisation (9.9%) are also low. 

Low levels of spare capacity coincide with elevated levels of labour supply. Like employment, the participation rate has been volatile in 2025. In May, it eased from 67.1% to 67.0% - a level only just below the series high of 67.2% in January. The employment to population ratio - the share of working aged people in work - at 64.2% is also only fractionally below record highs. 

Hours worked rose by 1.3% in May, the strongest rise in 14 months and an outcome that wouldn't have been out of place last month when employment surged. As it was hours worked lifted by just 0.2% in April. The catch-up effect as well as a low base (May 2024 hours fell by 0.7%) saw annual growth in hours worked accelerate from 1.1% to 3.1%, the fastest pace since August 2023. 

In summary | May 

Today's report was all over the place giving mixed signals on the key indicators. Despite volatility in the data, labour market conditions are solid overall. Unemployment is low and participation is high. The RBA is lowering rates on inflation progress, cutting twice this year at a quarterly interval. The case for the RBA to speed up its easing cycle with a July cut rests on the Board responding to Q1's weak GDP outcome.  

Preview: Labour Force Survey — May

Australia's monthly update on the labour market for May is due from the ABS at 1130 today. Employment rediscovered form in April surging by 89k to keep the unemployment rate in check at 4.1% as labour force participation (67.1%) returned to near record highs. The RBA still went onto to cut its cash rate by 25bps to 3.85% in late May and signalled a willingness to go further. A cut in early July firmed in market pricing to a roughly 3 in 4 chance after GDP growth slowed sharply to just 0.2% in the March quarter. Today's report would likely have to surprise strongly to the upside again to move the dial.  

May preview: Employment expected to moderate 

A moderate increase in employment of 20k in May is expected in today's report following April's monumental upside surprise print (89k). The unemployment rate is seen holding at 4.1% (range: 4.1% to 4.2%), based on the participation rate remaining at 67.1%. After returning to near record highs last month, it will be interesting to see if participation has lifted further. If it has, and employment moderates as expected, there could be some upside risk to the unemployment rate.  

Volatility within the dataset appears to be more elevated at present. Factors that have likely played a role here have been a large increase in retirements at the start of the year and the disruptions caused by Cyclone Alfred in March. A wildcard in May could be the federal election. Following past elections, the ABS has sometimes identified a noticeable impact on employment from the temporary hiring of polling officials. Any such effect would likely be highlighted in the media release accompanying today's report. 

April recap: Resurgent employment rises to 14-month high 

Employment surged to its strongest increase since February last year rising by 89k in April, well above the 22.5k lift expected. This followed outcomes that missed expectations in February (-56.3k) and March (36.4k). April's gain was driven by full-time employment (59.5k) with the part-time segment playing a supporting role (29.5k). 

On the strength of the rise in employment, the national unemployment rate remained unchanged at 4.1%, even as the labour force participation rate accelerated from 66.8% to 67.1%, returning to near record highs. However, there was a slight increase in underemployment (5.9% to 6%) and total labour force underutilisation (9.9% to 10.1%) following a soft outcome for hours worked. 

Hours worked showed no change in April from the previous month (0%), though annual growth firmed to a 1.1% pace from 0.7% previously. The flat outcome for hours worked is surprising given the rise in employment (0.6%), but it could set the stage for hours worked to pick up in the months ahead. 

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.