RBA extends pause in November

The RBA left the cash rate on hold at 4.35% (and the ES rate at 4.25%) at today's meeting, marking 12 months of unchanged monetary policy settings in Australia. There was little reaction in either the bond or FX market, with pricing for an RBA rate cut remaining all the way out in May next year following today's decision statement, updated economic forecasts in the Statement on Monetary Policy, and Governor Bullock's press conference. The RBA has not moved from its assessment that aggregate demand in the economy is exceeding supply, reaffirming that rates need to be kept 'sufficiently restrictive' with inflation still not expected to return 'sustainably' to the 2-3% target range until 2026. 

The main shift in today's statement compared to the September meeting was the Board's emphasis on underlying inflation. This came after headline inflation declined from 3.8% to 2.8% year-ended in Q3, falling inside the 2-3% target range on electricity rebates and lower fuel prices. Today's statement noted that underlying inflation was a better gauge of the momentum of inflation, and at 3.5%Y/Y (down from 3.9%) it remained elevated to target.    

Accordingly, the Board clarified that its priority is to return inflation to target 'sustainably'. For this to occur, underlying inflation needs to decline further. In the post-meeting press conference, Governor Bullock highlighted that lower services inflation and an easing in the pace of wages growth will be key to achieving this. But this is expected to be a protracted process; based on today's updated forecasts, underlying inflation is not seen returning to the midpoint of the target until 2026, an outlook largely unchanged from the August forecast round. But there are risks to this outlook - both to the upside and to the downside - and Governor Bullock said the Board needed to gain greater confidence that underlying inflation is on track to return to target before it could consider cutting rates. 

The statement also focused on the strength of the labour market. Although conditions have eased, the RBA continues to assess that the labour market is tight relative to its judgement of full employment. Importantly, the RBA is neither seeking nor thinking that a deterioration in the labour market is needed to return inflation to target. For some time, the RBA has stated its strategy is to gradually bring inflation down in order to preserve the gains in employment achieved through the post-Covid cycle. 

All told, the RBA has retained its relatively hawkish tone compared to its G10 central bank peers currently cutting rates. The RBA is effectively data-dependent, and its messaging will start to shift if either employment or inflation deteriorates unexpectedly. The next RBA meeting is on 9-10 December.  

Preview: RBA November Meeting

Today's RBA meeting (decision due 2:30pm AEDT) appears relatively straightforward, with the Board expected to continue its on-hold stance leaving the cash rate at 4.35% - a setting unchanged since November last year. Markets have done much of the heavy lifting for the RBA ahead of today's meeting; since the September meeting, the 3-year yield has risen more than 50bps to trade above 4% and pricing for a rate cut has been pushed out to May 2025 from a 50/50 prospect in 2024. Key factors have been the hawkish repricing of the Fed outlook, while on the domestic front strong labour market data has been given more weight than slowing inflation in Q3 driven by one-off electricity rebates. This gives the RBA cover to hold its hawkish line of keeping rates 'sufficiently restrictive' while many of its central bank peers overseas continue to cut rates. 

After leaving markets with the sense that policy was calibrated appropriately to balance the risks to its employment and inflation objectives at the conclusion of the September meeting, little is expected from the RBA today. The strength of the domestic labour market has been reaffirmed with employment surging 64.1k in September, holding the unemployment rate to 4.1% as participation lifted to a new record high (67.2%). The Q3 CPI report showed inflation is falling a little ahead of the RBA's forecasts from August; headline inflation slowed from 3.8% to 2.8% and trimmed mean (or core) inflation eased from 3.9% to 3.5%. 

These forecasts will be updated in the quarterly Statement on Monetary Policy that will accompany today's decision, but one inflation report where the declines were driven largely by temporary, volatile factors (electricity rebates and fuel prices) is unlikely to prompt a material revision to the RBA's current outlook for inflation to return to the inflation target 'sustainably' in 2026. For a relevant comparison, the ECB required multiple forecast rounds where inflation surprised to the downside before it was confident enough to start its easing cycle.

Overall, the combination of a robust labour market and inflation still seen some way off from sustainably holding in the target range sets up for the RBA to broadly reaffirm its messaging from September. Expect Governor Bullock in the post-meeting press conference to repeat that rate cuts are not on the radar, with more progress needed on inflation before it can move into an easing cycle. 

Macro (Re)view (1/11) | Yields extend climb

Bonds continued to sell off this week with solid growth and inflation data in the US and euro area combining with a poorly received UK budget to push yields higher. This saw the euro supported against broader US dollar strength, seeing the Australian dollar weaken into next week's presidential election where betting markets still lean towards a Trump victory. The overall backdrop was a headwind to equities, which softened broadly across the US, Europe and Asia.  

US data this week confirmed solid economic momentum and inflation still elevated relative to target, factors that have driven the recent repricing of the Fed's easing cycle. Growth in the US economy expanded by 0.7%q/q in Q3 and 2.7% through the year, bolstered by resilient household consumption (3%Y/Y). Meanwhile, the Fed's preferred inflation gauge - the core PCE deflator - remained at 2.7%yr in September, still somewhat above the Fed's 2% target. Markets largely looked through the October payrolls report - employment rising by just 12k against a low conviction median estimate of 100k -  due to the effects of hurricanes and industrial strikes. An unchanged unemployment rate of 4.1% and the employment cost index moderating from 4.1% to 3.9% year-ended in Q3 - a low since Q4 2021 - were inputs markets saw as consistent with labour market conditions continuing to rebalance from cycle tights. 

Although not to the scale of the 2022 crisis, the UK budget - the first under the new government - became a market event. The details announced by Chancellor Reeves unveiled a high spend-and-tax budget, the independent Office for Budget Responsibility (OBR) estimating the new measures raise the public spend by almost £70bn a year for the next 5 years, spending that is roughly 50% funded by a range of increased taxes. Government debt will be increased to cover the shortfall, rising in the order of £32 per year across the forward projections. The combination of increased gilt issuance - pressing £300bn in 2024/25 and 2025/26 according to the DMO's post-budget remit - and the OBR's assessment that the budget raises the near-term outlook for GDP growth above potential and adds to inflationary pressures saw markets reprice on expectations for a more gradual BoE easing cycle.   

In the euro area, markets were given pause to review their dovish interpretation of the ECB's reaction function. Bets for a 50bps rate cut from the ECB in December were scaled back as Q3 GDP growth and inflation estimates for October surprised to the upside, while the ECB's Schnabel pushed back on aggressive cuts. Economic activity - likely boosted by the Paris Olympics - outperformed modest expectations (0.2%) advancing 0.4% in Q3 (0.9%Y/Y), its strongest quarterly growth in 2 years. October's flash estimates reported headline inflation lifted from 1.7% to 2.0%yr while the core rate held at an unchanged 2.7%yr pace, both measures 10bps above consensus.

Markets look to have already done much of the RBA's work ahead of next week's meeting, pushing pricing for rate cuts well into 2025. While electricity rebates and declining fuel prices have revived Australia's disinflationary process - headline CPI slowed to 0.2% in Q3 lowering the annual pace from 3.8% to 2.8% - core (or trimmed mean) inflation (0.8%q/q) eased more modestly from 3.9% to 3.5% year-on-year, a pace still elevated enough to the 2-3% target band to keep the RBA hawkish to rate cut prospects in the near term. More in-depth analysis of the Q3 CPI report can be found in my review here. In other key developments in Australia this week, household demand remains subdued, though retail volumes picked up (0.5%) in Q3 (see here); dwelling approvals lifted 4.4% in September as house approvals rose to their highest level in 2 years (see here); and housing finance commitments saw their first decline in 8 months easing modestly (-0.3%) in September (see here). 

Australian housing finance -0.3% in September

Australian housing finance commitments saw their first fall in 8 months easing by 0.3% in September, missing the 1% rise expected. Commitments slowed from the prior month (2.1%) as lending to investors fell by 1%; owner-occupier commitments were broadly flat (0.1%). Lending has defied higher interest rates accelerating by almost 19% over the past year as strong demand for housing has run up against supply constraints, driving credit growth (5.1%yr) and housing prices (6.0%yr). The ABS has confirmed today the housing finance series will shift from a monthly to a quarterly frequency, returning in February 2025 covering Q4 2024.

Housing finance commitments posted a month-on-month decline for the first time since January - albeit a very modest one down by 0.3% in September to $30.2bn. Despite higher interest rates reducing borrowing capacity and affordability being pressured by rising housing prices, commitments have risen by 18.9% over the year and are up 28.8% on the cycle low ($23.5bn) seen in February 2023. 

This cycle has been driven by investors, with owner-occupiers playing a supporting role. Despite falling by 1% in September, commitments to investors lifted by 7.1% across the quarter - up 29.5% on 12 months ago. At $11.6bn, monthly lending to investors is just below record highs, with rising housing prices and rents amid very low vacancy rates providing an attractive backdrop. Owner-occupier commitments - largely unchanged in September (0.1%) - saw a 3.2% rise in Q3. Lending to the segment was $18.6bn in the most recent month, up 22.8% on the recent low in July last year.   

Taking a closer look at the owner-occupier segment, the effects of higher interest rates and affordability concerns are visible in parts of the market. The value of construction-related lending was down 2% in the quarter, matched by a 4.7% fall in underlying loan volumes. Meanwhile, first home buyer lending slowed to a 0.4% rise in Q3 - down from an 8.1% acceleration in Q2 - with loan volumes contracting 0.9%q/q. This left upgraders - existing home owners - to drive quarterly growth in owner-occupier lending rising by 4.4% on a 1.6% lift in loan volumes. 

Refinancing has held a broadly flat level since the turn of the year after retracing from the highs of mid-2023 alongside the RBA's hiking cycle. In September, owner-occupiers (3.5%) lifted total refinancing to a 2.1% rise, overcoming a decline (-0.4%) from investors. For Q3, refinancing advanced by 1.5% on gains for both owner-occupiers (1.7%) and investors (1.2%).    

Australian dwelling approvals rise 4.4% in September

Australian dwelling approvals lifted by 4.4% in September, coming in topside on consensus (2.1%) and rebounding from a 3.9% decline in August (revised from -6.1%). House approvals (2.4%) continued to defy the headwinds from higher interest rates, pressing ahead for the 8th month on end to reach their highest level since August 2022. An 8.4% rise from the volatile higher-density segment also contributed to the uplift in approvals.  

Momentum in dwelling approvals continues to extend on strength in the house (or detached) segment. Nationally, approvals lifted by 4.4% in September (14.8k), rising by 6.3% across the quarter to their highest quarterly total (43.9k) since Q4 2022. House approvals advanced 2.4% month-on-month to 9.9k (16.3%yr), levels near the peaks of earlier cycles. In the most recent quarter, house approvals lifted by 4.1% to 29k, a high since Q2 2022. 

In the higher-density segment, approvals increased by 8.4% in September (5k), continuing their volatile month-to-month profile of recent times. For Q3, unit approvals lifted by 10.7% to 14.9k, a level just off cycle lows.   

A couple of key factors are supporting the uptrend in house approvals, despite higher interest rates. Firstly, population growth is driving very strong demand for housing; and secondly, the rate of housing completions has been outpacing new commencements for some time, driving more approvals.  

Strength in house approvals has been broadly based across the nation, though New South Wales has been a notable exception where approvals are down 20.3%yr. The momentum in house approvals at the national level is being driven by Western Australia, the state seeing a 60.2% rise over the past 12 months. South Australia (29.8%) and Queensland (23.8%) have also contributed strongly. 

The 10.7% quarterly rise in higher-density approvals looks to have been driven by the high-rise category, particularly in Melbourne and Brisbane. Low-rise units appear to have played a lesser role, while townhouse developments edged lower in Q3. 

Australian retail sales 0.1% in September; Q3 volumes 0.5%

Australian retail sales slowed to a 0.1% rise in September (vs 0.2% forecast) following a strong gain in August (0.7%). This slowing suggests warm late winter weather supported spending in August rather than the Stage 3 tax cuts or cost-of-living support measures. The August result drove retail sales to a 1% rise across Q3, the strongest quarterly rise since late 2022.    

Growth in underlying retail sales volumes slightly outperformed expectations advancing by 0.5% in Q3 (vs 0.4%) - only the second quarterly increase of the past 2 years - rebounding from a 0.7% decline over the first half of 2024. Nonetheless, retail demand is weak. Growth in headline volumes is just 0.2% over the year, but volumes have contracted sharply by 1.9% in per capita (or population-adjusted) terms. Weakness in demand is taking pricing power away from retailers; growth in retail prices paid by consumers softened to a 0.6% increase in Q3, down from 1% in Q2, with the annual pace of 2.5% now a fraction of the peaks north of 7% seen in the back half of 2022.   

Discretionary-related categories drove the lift in quarterly volumes, rising by 0.9% on a headline ex-food basis. Within this, clothing and footwear (1.9%) and department stores (1.4%) posted the strongest gains, the former seeing its best outturn in more than 2 years. Household goods and 'other' retailing both advanced by 1%. Weakness in Q3 centred in basic food (-0.3%), with dining out also softer (-0.2%) and down sharply through the year (-2.6%).   

Sentiment indicators recently have suggested that the gloom households have felt over the past couple of years is starting to ease. Inflation is coming down - helped by rebates (see here) - the Stage 3 tax cuts are now in play and the labour market remains strong. Based on today's result for retail volumes, consumer demand looks to have remained tepid in Q3; however, these factors set up a more encouraging dynamic into year-end. 

Australian Q3 CPI 0.2%, 2.8%Y/Y

Australian headline CPI inflation is inside the RBA's 2-3% target band for the first time in the post-Covid cycle, falling sharply in the September quarter on government electricity rebates and a near 7% decline in fuel prices. But elevated price pressures across the core of the basket - and in services - will likely keep the RBA hawkish to near-term rate cut prospects at next week's meeting. Markets went into today's report having pushed back the timing of the RBA's first cut to April/May 2025. 

Headline inflation was 0.2% in the September quarter - below the 0.3% outcome expected - its weakest pace since the onset of the pandemic in 2020, falling from consecutive 1% increases across the first half of the year. Annual inflation declined from 3.8% to 2.8% (2.9% expected), a low back to Q1 2021. 

Underlying inflation as measured by the RBA's preferred trimmed mean indicator printed at 0.8% for the quarter and 3.5% over the year, both in line with market estimates and softening from the outcomes in Q2 of 0.9%q/q and an upwardly revised 4.0%Y/Y (from 3.9%). 

The board below summarises the key details from today's report for the September quarter, comparing the outcomes to the June quarter. 

After rising at a 1% pace through the first two quarters of the year, headline CPI fell to 0.2% in the September quarter, swinging on federal and state government rebate schemes on household electricity bills and declines in petrol prices. Combined, electricity and fuel deducted 0.9ppt from quarterly inflation. 

Electricity prices fell by 17.3% in the quarter (-15.8%Y/Y) as the Federal government's energy rebate for every household in the nation ($300) came into effect, with additional rebates introduced by state governments also applying in Queensland ($1000), Western Australia ($400) and Tasmania ($250). 

Prices at the petrol pump in Australia fell by 6.7% across the September quarter - down 6.2% through the year - reflecting declines in global oil prices due to a weakening demand backdrop. This drove an overall decline of 2.2% in the transport group in Q3, with government subsidies for public transport (-2.1%) in Brisbane, Canberra, Darwin and Hobart also playing a role.  

Key movements that pushed up on inflation in the quarter included new dwellings (1%q/q) on the continuation of cost pressures in the home building sector, while grocery prices lifted 0.6% on the back of higher fruit prices (3.5%q/q). Travel costs rose by 1.4% in the quarter due to increased demand for domestic and international tourism. Rents (1.6%q/q) continued to add to inflation; however, increasing support via the Commonwealth Rent Assistance Scheme has seen annual growth in rents moderate to 6.7% from its recent high of 7.8%. The ABS reported that rent inflation would otherwise have increased by 8.5% over the year to Q3. 

Looking ahead to next week's RBA meeting, a key aspect of the Q3 CPI report is the breakdown between goods and services inflation. Overall, declining inflation continues to be driven by goods. Global falls in goods and energy prices (as well as the government electricity rebates) have seen goods inflation fall to a 1.4%Y/Y pace - its slowest since Q1 2021. 

By contrast, services inflation firmed from 4.5% to 4.6%Y/Y in Q3 - down from the highs of 6.3% in Q2 last year but still elevated. The trajectory of services inflation is key to the RBA's outlook for a return to the midpoint of the 2-3% band, currently forecast for 2026. On the basis of today's report, the RBA looks likely to maintain its messaging on needing to remain vigilant to upside inflation risks, particularly given the strong run of recent labour market prints. 

Preview: Australian Q3 CPI

Australia's September quarter CPI inflation report is due for release at 11:30am (AEDT) today. Government rebates and cost of living support will revive the disinflationary process in Australia that slowed over the first half of 2024. Headline inflation is expected to print at 0.3% in the quarter, potentially lowering the annual pace inside the RBA's 2-3% target band. But with inflation falling due to one-off factors and underlying CPI seen easing more modestly, RBA rate cuts look to remain off the table near term. Pricing for the RBA's first cut has been pushed back well into 2025 - a function of the RBA's communication, strong domestic labour market data, and the hawkish reappraisal of the Fed's easing cycle. 

September quarter preview: Headline CPI to fall on rebates; core more resistant   

Headline inflation is expected print at 0.3% quarter-on-quarter (range: 0.2-0.4%) and 2.9% year-on-year, down substantially from its current pace (1.0%q/q, 3.8%Y/Y). Government rebates on electricity bills came through in the September quarter, while other cost of living supports - rent assistance and public transport subsidies - and lower fuel prices are also key factors. Excluding these (and other) volatile components, trimmed mean (or core) CPI is forecast at 0.7% quarter-on-quarter (range: 0.3-0.8%) and 3.3% year-on-year, down from 3.9%. 

These estimates for annual inflation (headline 2.9%, trimmed mean 3.3%) compare to the RBA's year-end forecasts of 3.0% headline and 3.5% trimmed mean. The RBA currently projects inflation won't return sustainably to the midpoint of the target band until 2026. More on Australia's current inflation dynamics is covered in the recap section below.  

Monthly CPI data reported a 6.4% decline in electricity prices in July into a 14.6% fall in August as government rebates came in. The larger fall in August reflects the Commonwealth government rebate scheme ($300 over 4 quarters) broadening to all states and territories after applying only to Queensland and Western Australia in July. Separate rebate schemes introduced by the state governments in Queensland ($1000), Western Australia ($400) and Tasmania ($250) commenced in July. Other cost of living supports - the Commonwealth Rent Assistance scheme and public transport subsidies (Brisbane, Hobart and Darwin) - will also lower inflation in Q3.  

Declines in fuel prices are another key factor in the most recent quarter. A weakening global demand backdrop has weighed on oil prices in recent months, translating to a 5-6% fall in prices at the petrol pump in Australia across July and August. Compared to 12 months ago, fuel prices are down by 7.6%. 

A recap: Inflation remained elevated in the June quarter 

Disinflationary progress in Australia slowed over the first half of the year leaving annual inflation still well above the RBA's 2-3% target band. Headline CPI was 1.0% in the June quarter - an unchanged pace from Q1 - the annual rate firming from 3.6% to 3.8%. Trimmed mean inflation came in at 0.8%q/q and 3.9%Y/Y, easing slightly from the outcomes in the March quarter (1.0%q/q and 4.0%Y/Y).

Above-target inflation continues to be underpinned by market services and housing-related costs, though inflation has eased in both areas. Market services inflation cooled to a 4.1%Y/Y pace in Q2, down from its highs of a year earlier (6.8%) as demand for discretionary services such as dining out, entertainment, and travel has softened. 

Housing inflation at 5.2%Y/Y has roughly halved from its peaks. New home building costs have slowed as higher interest rates have weighed on housing construction while materials and labor shortages have become less acute. Although still at 15-year highs (7.3%), rent inflation has been curtailed by increases to the Commonwealth Rent Assistance scheme announced last year.

Other factors have also contributed to the decline in headline inflation. Notably, global disinflationary trends in goods and energy prices continued to filter through to Australia in Q2, while inflation across the grocery basket has declined significantly over the past year..         

Macro (Re)view (25/10) | Election trades take up the running

A quiet macro calendar this week seemingly saw markets turning their attention to the US election. Higher treasury yields and further US dollar strength reflect the increasing probability of a Trump victory in betting markets. Growth differentials also continue to play their part, with more signs of strength in the US economy contrasting with weakness in Europe, opening up the possibility of a 50bps rate cut from the ECB in December. Meanwhile, the Bank of Canada stepped up its easing cycle by announcing a 50bps rate cut to 3.75%, citing the need to support growth and keep inflation at the midpoint of the 1-3% target band. 

The Fed's Beige Book - touted as a key input behind the FOMC's decision to deliver a 50bps rate cut last month - reported US economic conditions were broadly steady and employment increased across districts in September. The previous version in August highlighted a rise in the number of districts where growth had deteriorated from 5 to 9, one insight that may have pushed the FOMC to frontload the start of its easing cycle. Markets have subsequently reduced rate cut expectations as the incoming activity and employment data have surprised to the upside. This week, October's PMI was reported at 54.3, up from 54.0 in the prior month, a reading indicative of solid US growth early in Q4.   

A largely unchanged reading in the euro area composite PMI in October (49.7) suggests economic activity in the bloc has stalled, slowing from moderate growth in the middle of the year. With soft demand continuing to take pressure off inflation - output prices rose at their slowest pace since 2021 - the ECB is increasingly turning to addressing weak growth, as President Lagarde highlighted at last week's meeting. Comments from ECB officials throughout the week at the IMF summit reaffirm that another 25bps rate cut is on the cards at the December meeting, but market pricing factors in a material chance of a 50bps move. 

Within the PMI report, there were warning lights from a growth perspective, notably that growth within the bloc is weakest in Germany and France - the two largest economies - while employment also fell in both countries. Additionally, activity in the services sector - the growth engine for the euro area with manufacturing (45.5) having been in a downturn since late 2022 - slowed to an 8-month low (51.2). The 5th consecutive monthly fall in new orders gives a bearish view on the near-term outlook, while export orders declined amid weaker demand conditions abroad. 

A light week for events in Australia has added to the anticipation for the Q3 CPI report, due Wednesday morning (AEDT time). Government rebates on household electricity bills and lower fuel prices are expected to see headline inflation slow sharply to 0.3%q/q and 2.9Y/Y. While this could see annual inflation fall to a low since 2021, the Board has made clear that its focus is on underlying inflation, which is forecast at 0.7%q/q and 3.3Y/Y. Based upon robust labour market conditions and ongoing elevated underlying inflation, markets see the RBA delaying the start of its easing cycle until well into next year.