Macro (Re)view (3/10) | Markets brush off shutdown concerns

Market sentiment remained upbeat despite the US government shutdown, which delayed the key nonfarm payrolls report for September. The availability of other data releases, including the next CPI report, is now uncertain. However, data issues aside, expectations are set firm that the Fed will cut rates once - if not twice - by year-end. The shutdown is also widely view as activity delayed not forgone, while markets are also sanguine due to the Atlanta Fed's estimate for Q3 GDP growth tracking at a robust 3.8% annualised pace. 

A hawkish hold from the RBA this week kept the cash rate at 3.6% in a unanimous 9-0 decision. The recent run of stronger inflation and consumption data has seen the Board's tone turn more hawkish since its previous meeting in August. Over this period, market pricing for the next 25bps rate cut has been pushed back from November into early 2026. A more cautious tone appeared to be communicated by the Board on this occasion as the recovery in private demand was tracking ahead of expectations, inflation was showing signs of persistence in some areas, and the labour market was holding steady (reviewed here). 

At the post-meeting press conference, Governor Bullock noted that wealth effects, including from housing prices that were up a further 0.8% nationally in September, were supporting consumption, while the full impact of the RBA's 75bps of easing had yet to play through. Amid ongoing uncertainty around the global economy, Governor Bullock put the emphasis on the incoming data, notably the quarterly inflation report for Q3, and the RBA's next round of forecasts due for the November meeting as key to its reaction function. The RBA also published its semi-annual Financial Stability Review this week. One theme identified was that macroprudential policy could be called upon if risks in the housing market from the RBA's easing cycle were to build.

The Australian data to hand this week showed the recovery in consumption had cooled a bit with household spending rising by just 0.1% in August (5%yr), below expectations (0.3%) after a downwardly revised increase in July (0.4%) (reviewed here). Strength in services categories (0.5%) kept spending above water, as goods consumption declined (-0.2%). Volatility in global trade flows crunched Australia's surplus on goods trade from $6.6bn to just $1.8bn in August, its lowest level since 2018 (reviewed here). Exports saw their sharpest fall in 3 years (-7.8%) as non-monetary gold exports halved from record highs in July. A 3.2% rise in imports, boosted by consumption goods (5.8%), accentuated the deterioration in the surplus.

In the US, the absence of the September payrolls report put the focus on alternative labour market measures and the JOLTS data from earlier in the week. This, however, provided contrasting reads on conditions; employment contracted according to the ADP data by 32k in September, while the employment component of the ISM services index (47.2) posted its 4th straight reading in contractionary territory in September. By contrast, the Ravelio series estimated employment rose by 60.1k in September. Meanwhile, the Chicago Fed estimated the unemployment rate would have come in at 4.3% for September, unchanged from August. The hard data on the labour market from the JOLTS report showed that job openings job were higher than expected in August (7.227mn), while layoffs (1.725mn) were also less bearish than feared.     

The euro area rates outlook remains unchanged, with the ECB set to stay on pause following the latest inflation data. Energy prices drove headline inflation up slightly from 2% to 2.2%yr in September and the core rate remained at 2.3%, both measures in line with expectations. In a speech this week, ECB President Lagarde said inflation risks 'appear quite contained in both directions'. Meanwhile, unemployment in the bloc remains around historic lows but ticked up from 6.2% to 6.3% in August. Over in the UK, June quarter GDP growth slowed to 0.3% (as expected) from a 0.7% pace in the March quarter. The upcoming Autumn Budget (26 November) remains the key focus for markets.  

Australian household spending rises modestly in August

Australian household spending rose by a very modest 0.1% in August, below expectations for a 0.3% increase. Annual growth eased from 5.3% to 5%. At Tuesday's RBA meeting, Governor Bullock cited the recovery in household spending as a factor in the decision to leave the cash rate on hold. Wealth effects from increasing asset prices, rising real incomes and 75bps of RBA rate cuts were all supporting household spending according to Governor Bullock. Improving sentiment is likely to also be a contributing factor.     

Household spending rose for the 4th straight month lifting by 0.1% in August. This followed earlier gains in this run of 0.4% in July (revised from 0.5%), 0.5% in June and 1% in May. The headline increase in spending for August was underpinned by areas including transport (0.8%) and hotels, cafes and restaurants (0.3%), helping to offset declines in recreation and culture (-0.9%) and alcoholic beverages (-0.9%).  

Taking a broader perspective, growth in household spending continues to be weighted towards services over goods. Services spending lifted a further 0.5% in August to be up 8.1% over the year. By contrast, goods spending declined for the second month running, down 0.2% after a 0.5% fall in July. Annual growth for goods is tracking at 2.5%.

Australia's trade surplus narrows to $1.8bn in August

Australia's goods trade balance fell from $6.6bn to $1.8bn in August, the lowest surplus posted since June 2018 and vastly below the $6.1bn figure expected. Exports were crunched by 7.8%, their sharpest fall in 3 years, on a pullback in non-monetary gold from record highs in July. Spending on imports meanwhile lifted by 3.2% in the latest month, rebounding from weakness through June and July. 

   

Australia posted its 92nd consecutive goods trade surplus in August, though at $1.8bn this was the smallest surplus since the early stages of this run dating back to the start of 2018. This was a sharp narrowing from last month when the surplus surged to $6.6bn, its highest since February 2024. Surpluses have swung around in recent months, a period of extreme volatility in global trade due to US administration's new tariff regime and subsequent delays around its implementation. Smoothing the volatility, the trade surplus averaged $4.3bn over the past 3 months, and it has been around this level through most of the year. 

Exports fell by 7.8% for the month in August to $41.9bn ($AUD terms), down 2.5% on 12 months ago. This was the largest month-on-month decline for exports since July 2022. Non-monetary gold exports nearly halved to $3.3bn in August (-47.2%), after accelerating to a record high in July ($6.2bn). While a notoriously volatile category, this is a surprising movement given the elevated levels the precious metal is trading at. Non-rural goods exports fell 2.8% to $31.8bn, driven by weakness in coal (-4.8%), LNG (-8.4%) and metals (-8%). Iron ore exports (0.2%) held their own. Going against the trend, rural goods lifted by 3.1% to $6.6bn; these exports have surged in value over the past year (22.1%) amid strong offshore demand for Australian produce.  

    

Spending on imports increased by 3.2% to A$40bn in August, a new record high that stands 7.8% above its level from 12 months prior. All categories rose in the latest month. Consumption goods increased by 5.8% ($12.7bn), their strongest lift since December 2023 - albeit after sizeable falls in June (-5.4%) and July (-3.2%). Underlying drivers included vehicles (7.1%) and clothing and footwear (5.7%). A 2% rise came through in intermediate goods ($16bn), while capital goods advanced by 1.8% to $9.9bn.  

RBA unchanged in September

The RBA left the cash rate at 3.6% in a unanimous decision by the 9-member Monetary Policy Board at today's meeting in Sydney. Having cut rates on three occasions this year by a total of 75bps, today's message was one of caution from the Board, with the full effects of less restrictive policy still to play out and due to upside risks to inflation. Markets interpreted this as a hawkish hold that indicated a rate cut at the next meeting on Melbourne Cup day was now less likely than a 50/50 prospect. At the post-meeting press conference, Governor Bullock said the outcome will come down to the upcoming inflation and labour market data and the RBA's updated economic forecasts.  

Today's decision to leave rates unchanged was widely expected, continuing the cut-hold sequence the RBA has stuck to since its easing cycle commenced in February. Key factors the Board cited in its decision statement were the recovery in private demand, areas of inflation persistence and labour market tightness. Rate cuts are seen to be working as anticipated but will likely continue to support demand and that has the RBA cautious at this stage. The domestic data and developments offshore (particularly around trade) hold the keys to unlocking further easing. Markets still expect the RBA will cut rates at least once more this cycle, though that is not fully priced until next year now. 

The uptick in the monthly CPI data through July and August have suggested to the Board that inflation may be set to come in stronger in Q3 than RBA staff earlier forecast. The full quarterly CPI report that the Board sets policy to is not due until late October. Governor Bullock said the labour market had eased with employment growth slowing and wages growth cooling, but the Board still judged conditions to be skewed towards the tight side.

Positive signs have emerged around the consumer, which the Board attributed to rising real incomes, wealth effects, and the earlier rate cuts. There is a case that this makes the need for further easing a little less pressing, though the Board does not seem entirely convinced by the durability of this recovery. On the other hand, if the recovery is sustained, the Board sees risks that businesses may start to pass through higher costs again and tightness in the labour market could reaccelerate. The next RBA monetary policy meeting is due for November 3-4.  

Australian dwelling approvals down sharply in August

Australian dwelling approvals fell sharply for the second month in succession posting a 6% month-on-month decline in August after contracting by a downwardly revised 10% in July. Approvals had been expected to rebound modestly by 2.8% in August. These consecutive declines have seen approvals slide from a 34-month high in June (17.4k) to now stand at their lowest level in a year (14.7k). Although RBA rate cuts appear to have helped drive an uplift in housing prices, the effect on the housing construction cycle looks limited at this stage.  

Dwelling approvals nationally fell by 6% in August to 14.7k, their lowest figure since August last year. Both major segments contributed to this result: unit approvals fell by 10.6% (5.6k) and house approvals were down by 2.8% (9.1k). On a 3-month average basis, house approvals are tracking at 9.3k and unit approvals at 6.7k - levels that, as the chart below shows, are well below the highs from earlier cycles.     

By contrast with the softness in approvals for the housing construction pipeline, alterations continue to remain strong. The value of alteration work approved actually fell 9.9% in August but remains at an elevated level ($1.1bn). This partly reflects inflationary effects on these costs over recent years but there is also a demand element at play. The recent June quarter national accounts reported that alteration work by volume rose 4.9% through the year.  

Preview: RBA September meeting

The RBA's Monetary Policy Board (MPB) is expected to stick to sequence today by reverting to holding the cash rate steady (3.6%) following a 25bps cut at its previous meeting. This gradual, cautious approach has seen the MPB deliver 75bps of cuts since the start of the year, and markets expect the easing cycle has further to run pricing in another 1-2 rate cuts. Inflation remains in the driving seat for policy, though there have been recent signs of cooling in the labour market. The MPB has tied rate cuts to progress in the key quarterly inflation data, and with the next report for Q3 not due until October 29, it will likely switch back to wait-and-see mode today.

The MPB goes into this meeting having cut rates by 25bps in a unanimous decision (9-0) last time out, which followed 25bps cuts in February and May. Headline inflation slowing to 2.1%Y/Y and 2.7%Y/Y on a core or trimmed mean basis in the June quarter CPI report gave the RBA increased confidence that its forecast trajectory for inflation to settle around the midpoint of the 2-3% target band remained on track. At last week's parliamentary testimony, Governor Bullock summed the situation up by saying that the MPB was in a 'very good position on inflation'. However, there is likely to be some caution expressed today due to the monthly CPI indicator rising through July and August, pointing to upside risks to quarterly inflation.  

In the labour market, while employment growth was acknowledged to have slowed, Governor Bullock's view was that conditions remained broadly consistent with its full employment objective. The RBA's updated forecasts last month showed the unemployment rate is expected to tick up slightly to 4.3% and then hold at that level over the next couple of years. The main risk is that unemployment creeps a little higher if employment growth continues to remain lacklustre. However, signs of a long-awaited recovery in consumer spending drove GDP growth to 0.6% in the June quarter, lifting year-ended growth to 1.8% - slightly above the 1.6% pace forecast by the RBA. If this momentum can be sustained, that bodes well for the labour market outlook.

Macro (Re)view (26/9) | Data drives USD rebound

Strength in US data and renewed tariff risks were factors that contributed to a modestly hawkish tone to markets this week. Treasury yields moved up led by the front end of the curve, the US dollar advanced and US equities softened. In that mix of US data were better-than-expected jobless claims (218k), an upward revision to Q2 GDP growth (3.8%q/q annualised) and a positive surprise for personal spending (0.6%m/m). A sterner test awaits next week in the form of the September payrolls data given the recent signs of weakness in the labour market that prompted the Fed to resume its easing cycle. 

The wide range of views on the policy outlook amongst Federal Reserve officials was on display this week. The most measured remarks were unsurprisingly from Chair Powell, reaffirming a data-dependent approach that referenced risks to both sides of its mandate for 2% inflation and full employment. Those advocating for a more proactive approach to further easing (Miran, Bowman and Schmid) highlighted risks to the labour market as a key consideration. Inflation continues to remain firmly above target coming in at 2.7%yr in August for the PCE deflator while the core PCE deflator was 2.9%yr (both as expected), and President Trump's latest tariff orders add new upside risks.    

Indicators of euro area and UK economic activity in the private sector remained consistent with modest growth in September. The Composite flash PMI readings came in at 51.2 in the euro area and 51 in the UK, both above the 50 level that separates contraction from expansion. Whereas the ECB appears near the end of its easing cycle, the UK's has further to run. Bank of England Governor Bailey said this week that there is 'still some further journey down in rates' provided that inflation continues to cool, with cautious households having tightened their spending. There are also ongoing concerns around the UK labour market.      

The RBA is set to hold the cash rate at 3.6% next week, with Governor Bullock telling the Standing Committee on Economics that it is in a 'very good position on inflation' while the labour market is around full employment. Reverting to a hold after cutting rates by 25bps at the previous meeting would keep to the sequence the RBA has followed this year. This has seen the cash rate fall by 75bps since February. Forecasts published by the RBA last month that were based on some 50bps of further rate reductions pointed to inflation settling at the midpoint of the 2-3% target range and the unemployment rate staying in the low 4s. Since the August meeting, Governor Bullock's view was that the incoming data had broadly reaffirmed this outlook, and if anything was slightly stronger than expected. 

As with the previous 3 rate cuts, the quarterly CPI data will be key. In looking ahead to that report on October 29, the ABS's monthly inflation indicator is suggesting prices have risen at a slightly faster pace in the current quarter than in Q2. Headline CPI firmed from 2.8%to 3%yr in August, adding to its earlier rise from 1.9%yr in June (see here). Measures that exclude volatile items, such as electricity with rebates pushing and pulling on inflation, have also run a little hotter through the past couple of months. 

Governor Bullock's appearance before the Committee was prior to the August inflation data, though at the hearing she again downplayed the weighting the RBA gives to the monthly CPI series for policy decisions due to its limitations and volatility. But it will be alert to the upside risks to inflation from the monthly indicator, so that effectively will put the RBA in wait-and-see mode until the quarterly release comes through. On the labour market, job vacancies fell by 2.7% for the 3 months to August; however, after a rise in the prior quarter, vacancies at 327k are flat on 6 months ago. Employment growth has slowed notably over recent months - a point acknowledged by Governor Bullock - but vacancies as a share of the labour force are still relatively high at 2.1%. This is well down from cycle highs but still appears to be a factor in the RBA's confidence in the labour market. 

Australian CPI 3% in August

Australian inflation firmed in August according to the ABS's monthly indicator. This follows upside surprises in the previous release for July. Annual headline CPI lifted from 2.8% to 3.0%, its fastest reading since July last year. Measures that exclude volatile food, energy and holiday prices also moved up. The data saw the AUDUSD trading 0.3% higher at a level north of 0.66 while the 3-year bond yield rose 6bps to just above 3.5%. The RBA meets next week where the Board is expected to leave rates hold; however, markets are broadly expecting a further 50bps of cuts before the current easing cycle is wound up. 

Inflation according to the ABS's monthly series picked up a little in August. Headline CPI rose from 2.8% to 3% in annual terms, above the 2.9% figure expected by markets. This is a very volatile series and as the RBA have essentially made clear by now, it will only move policy having seen the full quarterly data. To highlight an example of this volatility, the one-month change in the CPI was slightly negative at -0.1% but the change over the 3 months to August was a strong 1.1%. The RBA had enough confidence in the inflation trajectory to cut rates at its previous meeting, after the quarterly CPI cooled to a 0.7%q/q, 2.1%Y/Y pace. But the monthly reads through July and August suggest inflation is on track to tick up a bit in Q3 - unlikely by enough to prevent further easing but in a way that reinforces the RBA's gradual approach.

Inflation excluding volatile items (food, energy etc) lifted from a 3.1% to a 3.3%yr pace and a broader measure that also removes holiday travel prices and is seasonally adjusted rose from 3.2% to 3.4%. These were the highest readings for both gauges since July 2024. The trimmed mean - one of the key measures for the RBA in the quarterly release - softened a touch from 2.7% to 2.6%yr. In the monthly data, the RBA tends to place more weight on the seasonally adjusted measure excluding volatile items and holiday travel.      

A key driver of the volatility in monthly inflation has been electricity prices. Last month, differences in the timing of when government rebates had been applied in different states saw measured electricity prices rise by 13.5%. This month, however, electricity prices fell by 6.5%, as households in NSW and the ACT moved onto the federal government's extended rebate scheme of $150 paid in equal installments across two quarters. In annual terms, electricity prices soared from 13.6% to 24.6%, due to the effect of very large rebate schemes in WA and Qld falling out of the calculation.  

Prices in the housing basket have picked up to a 4.5%yr pace on rising electricity costs; however, at the same time rents, which have a 6.6% weighting in the CPI, are on the slide coming down to 3.7%yr in August, a low since November 2022. New home building costs are running at just a 0.7%yr pace, notwithstanding firmer readings of 0.4% in July and August.  

Macro (Re)view (19/9) | Fed resumes easing cycle

This week's central bank meetings played out broadly in line with expectations. The Fed, Bank of Canada and Norges Bank all cut by 25bps. Meanwhile, the Bank of England and Bank of Japan remained on hold. Price action was patchy across equities and in the major FX pairs, while movements in fixed income were contained. The major theme to come out of the week is that the Fed confirmed its focus has turned to supporting a softening labour market as it opened the door for a series of further rate cuts - a shift markets have been anticipating for some time. 

Rising risks around the US labour market saw the Fed resume its easing cycle, cutting rates for the first time this year by 25bps to 4-4.25%. Speaking at the post-meeting press conference, Chair Powell said this was a 'risk management' exercise that moved rates 'toward a more neutral policy stance'. The key area of concern is the labour market. Headline unemployment in the US is at 4.3% as of August, and Fed officials at this week's meeting forecast it to rise to 4.5% by year-end, with Chair Powell saying that the pace of hiring had fallen below the 'breakeven' level needed to prevent unemployment from rising. Accordingly, an additional rate cut was added to the forecast profile, now pointing towards 2 further cuts this year to the 3.5-3.75% range. 

While the reaction function is now being driven by the employment side of the Fed's dual mandate, inflation risks have not disappeared. Chair Powell said the risks to inflation were 'tilted to the upside' with uncertainty around the durational effect of tariffs on prices. The broad view is that tariffs are likely to have a relatively short-term impact on inflation, but it is wary of a scenario in which rising prices (particularly for goods) leads to renewed inflationary pressures.    

The Bank of England's MPC left interest rates on hold at 4% in a largely predictable meeting this week. It also decided to slow the pace of quantitative tightening (QT) from £100bn to £70 over the next 12 months, aimed at easing pressure at the long end of the gilt market. Both decisions were voted through on 7-2 majorities. On rates, the MPC reverted to holding steady after cutting at the previous meeting, sticking to a sequence it has maintained since August last year. Rates have fallen by 125bps over that period, and indications are that the easing cycle has further to run as the MPC retaining its longstanding guidance to cut rates taking a 'gradual and careful approach'. 

Markets have interpreted that as Bank Rate finding a landing point down around 3.5% by mid next year. The MPC's overall view is that conditions are finely balanced; on the one hand, it sees downside risks to growth and the labour market, while on the other there are upside risks around the inflation outlook. That comes as August's inflation readings remained elevated, with headline CPI holding at 3.8%yr and the core measure printing at 3.6%yr from 3.8%. Very influential to the latter, services inflation was 4.7%yr from a prior pace of 5%. 

Australia's unemployment rate remained at 4.2% in August, despite employment unexpectedly falling by 5.4k in the month against forecasts for a 21k rise (see here). A fall in the participation rate to 66.8% after 3 months at 67% meant the decline in employment was broadly offset by a decline in the labour force, holding the unemployment rate unchanged. However, the tone of the report was weak, reaffirming pricing for the RBA to continue cutting rates. Markets see the cash rate declining by a further 50bps by early next year.