Macro (Re)View (1/5) | Hawkish tilts

Several major central banks that met this week indicated an increased willingness to consider hiking rates as the conflict continues to threaten a longer and more persistent risk to inflation. But the question over demand destruction and the impacts to growth are keeping rates on hold - except for in Australia where another RBA hike is expected next Tuesday after this week's March inflation report. Crude oil (front month) rose by more than 8% this week to move back above the $100/bbl, with concerns rising over inventory levels with the Strait remaining closed. US equities still advanced as earnings results from the hyperscalers (tech and AI-related names) drove the major indices to close the week at record highs. Reports indicate that Japan intervened in the FX market to prop up the Yen, which had weakened against the USD to lows since 2024 amid the energy price shock and the BoJ remaining reluctant to hike. This coincided with broader USD weakness. 

   

There were signs of a hawkish tilt from the Fed this week, confirmed as the last meeting under the stewardship of Chair Powell - though he will stay on as a governor. The Fed kept rates steady at 3.5-3.75% and retained its easing bias; however, 3 members (Hammack, Kashkari and Logan) wanted it removed from the statement, while Miran was the outlier in voting for a 25bps cut. The Fed has been lowering rates since September 2024, with every decision statement since then containing an easing bias via a reference to considering 'additional adjustments' to interest rates. Powell said that with inflation increasing and the full effects of the energy shock still unfolding, a debate over the easing bias made sense. Market pricing has shifted towards no fed cuts this year from a position of pricing 1-2 cuts before the conflict.  

The Bank of England left rates unchanged at 3.75% this week. Although it is now somewhat more hawkish, there remains daylight between the MPC's messaging on policy and market pricing for around 3 rate hikes this year. Chief Economist Pill was the lone dissent, voting for a 25bps hike that resulted in an 8-1 split - the only change from its unanimous decision to hold in March. Still, the shift since the conflict arose has been notable. Before the energy price shock, a 25bps rate cut was only narrowly defeated in a 5-4 vote at the February meeting, while the MPC also had a clear easing bias. Its messaging now is that the 'scale and duration' of the shock will dictate the policy response. 

The latest Monetary Policy Report attempted to model the effects that could be felt on growth and inflation under 3 alternative paths for energy prices. In all scenarios however, inflation is now projected to be higher and growth weaker than previously forecast. At the post-meeting press conference, Governor Bailey highlighted that with the hawkish repricing of the rates curve for 3 hikes this year, financial conditions had already tightened notably, reducing the urgency for a policy move. Weakness in the labour market also argued against delivering the extent of tightening priced into the curve.   

At the ECB, the Governing Council left all 3 key rates on hold (depo rate remaining at 2%). The main change from the previous meeting was in the risk assessment to the outlook, with the statement now noting that upside risks to inflation and... downside risks to growth have intensified'. At the post-meeting press conference, President Lagarde stuck with the wait-and-see message. It went into the shock with inflation around target, and it had yet to see any signs of second-round effects of higher energy prices following through to prices of other goods and services. However, reporting with links to ECB sources indicated that a June rate hike is very much on the cards, unless there is a quick resolution to the conflict.  

In Australia, March inflation data came in a bit cooler than expected, but an RBA rate hike is still widely expected next week. Annual headline inflation rose from 3.7% to 4.6% in March on the back of a 33% surge in fuel prices (see here). The quarterly trimmed mean CPI - the more influential driver for RBA policy - was 0.8%, lifting from 3.4% to 3.5% over the year. With both headline and underlying inflation above the target band (2-3%) and risks to further upside, the RBA seems intent to continue hiking.   

Australian CPI rises to 4.6% in March

A 33% surge in fuel prices following the Middle East conflict sent headline inflation in Australia to its highest since 2023 in March. Although an even larger increase in inflation was expected by markets, the report keeps the RBA on track to continue its hiking cycle next week. Annual headline CPI increased from 3.7% to 4.6%, while quarterly trimmed mean inflation - the gauge the RBA uses to assess underlying inflation trends - was 0.8% in the March quarter and 3.5% over the year, up from 3.4% previously.   

Headline CPI rose by 1.1% month-on-month in March and 1.4% across the first quarter. In annual terms, headline inflation was 4.6% in the monthly series but a slightly lower 4.1% in the quarterly figures.  

Fuel prices - which had been falling before the conflict - surged by 32.8% in March, as regular unleaded petrol rose from 171 to 228 cents per litre. Premium unleaded fuel jumped by 30% to 250 cents per litre, while diesel increased by 41% to 256 cents per litre. From April 1, the Federal Government has halved the fuel excise tax for 3 months. 

While fuel was the major driver of inflation in March, the chart below shows that housing (yellow bars), food (green bars), and recreation and culture (light blue bars) have all played major roles over the past year in lifting annual inflation from the 2s to the 4s. 

Housing inflation reflects higher dwelling construction costs as well as the impact of government energy rebates unwinding, with electricity prices up by around 25% over the year. Meanwhile, food inflation has been boosted by rising input costs associated with dining out at restaurants. Higher prices for domestic travel and media services (subscriptions etc) drove the recreation and culture category. 

For the March quarter, trimmed mean CPI rose by 0.8% - a touch below consensus for 0.9% - and firmed from 3.4% to 3.5% at an annual rate, its highest since Q3 2024. The RBA's forecasts from February (due to be updated next week) that were tabled before the conflict had trimmed mean CPI projected to rise to 3.7% by mid-year before easing to 3.2% by year-end. 

 

With core inflation at the top or above its 2-3% target band, the RBA delivered back-to-back 25bps hikes in February and March. The RBA's argument has been that with trimmed mean CPI picking up, excess demand and other capacity pressures in certain sectors (such as home building) are reflected in higher inflation. The RBA through higher rates is attempting to cool that demand, while it regards the fuel price shock as an additional risk to prices more broadly if firms start to pass through that increase to consumers.   

Preview: Australian Q1 CPI

Australia's latest inflation report for March is due from the ABS this morning (1130 AEST). The report is expected to show headline inflation rising to highs since 2023 above 4.5% on the back of the fuel price shock. While the Federal Government's decision to halve the fuel excise tax for 3 months from April 1 will provide some short-term relief, the RBA is widely expected to continue its hiking cycle with another 25bps increase to the cash rate next week.   

March preview: Inflation to soar on fuel price shock 

Today's data for March includes the monthly and quarterly CPI figures. Both data points are relevant for the RBA. The 2-3% inflation target is benchmarked against the monthly data, while the quarterly trimmed mean is used to gauge underlying inflation trends - a key factor in monetary policy decisions. The RBA's inflation forecasts from February are now long out of date, but for reference annual headline CPI was seen at 4.2% by mid-year and trimmed mean at 3.7%.  

With that in mind, surging fuel prices are forecast to drive annual headline inflation (monthly series) up to 4.8% from 3.7%. Price monitoring by the ACCC reports that average unleaded fuel prices across the major capitals rose in the order of 50% between late February through March. As the chart below shows, fuel prices were actually falling ahead of the crisis. The quarterly trimmed mean is expected to print at 0.9%, with the annual pace lifting from 3.4% to 3.5%.

A recap: RBA hikes as inflation reaccelerates 

The RBA hiked the cash rate by 25bps in February and March after inflation reaccelerated over the back half of last year, breaching the top of the target band. Headline inflation rose 0.6% in the December quarter and 3.6% over the year, up from 3.2% previously. Trimmed mean CPI was 0.9% in the quarter, lifting from 3% to 3.4% year-on-year. The uptick in inflation was broadly based across goods and services, with other factors such as electricity rebates unwinding also playing a role.  

The monthly data have indicated that inflation remained elevated early in the new year, despite (as discussed above) fuel prices falling ahead of the conflict. Headline inflation printed at an annual pace of 3.8% in January and then 3.7% in February, while the trimmed mean held at 3.3%.     

Macro (Re)View (24/4) | Not so fast...

The reopening of the Strait of Hormuz referenced last week proved to be very short lived, with both the US and Iran reinstating blockades and restrictions. Market optimism was impacted as a result. Front month crude oil rose more than 13% for the week to close around $95/bbl, a headwind for equities and the more risk-sensitive EUR and AUD, while bond yields increased. Attention now turns to next week where the Fed, ECB and BoE are all due to hold policy meetings. Higher inflation is yet to show through in the data, so all central banks are likely to remain cautious - though the longer the crisis persists, a hawkish repricing of the rates outlook becomes a stronger possibility. 

The flash PMI readings for April were mildly consistent with stagflationary conditions - the main fear of markets surrounding the conflict - though growth was also displaying resilience, led somewhat surprisingly by the manufacturing sector despite surging fuel prices. The composite PMIs for the US (52) and UK (52) signalled an expansion in economic activity, having risen from March. Services activity rose, but the manufacturing sector was the key driver, with firms likely increasing output and restocking inventories in anticipation of supply disruptions. But there are questions going forward: confidence collapsed and input costs soared due to higher fuel prices. In the euro area, the composite PMI slipped into contractionary territory (48.6), but again the manufacturing sector saw an uptick.

Data in the US highlighted concerns around the consumer. The University of Michigan Survey confirmed sentiment in April collapsed to a record low. With fuel prices the obvious concern, inflation expectations for the year-ahead (4.7%) and long run (3.5%) horizons increased, a key point to keep in mind ahead of next week's Fed meeting. Markets still price some degree of easing this year, and the FOMC's own forecasts have one cut in the 2026 profile, but if there is concern around higher inflation expectations that could shift the narrative next week. Fuel prices underpinned a larger than expected 1.7% rise for retail sales in March, though the control group (that excludes fuel) at 0.7%m/m also surprised - the question is how durable that proves to be given the weakness in sentiment.

In the UK, headline inflation in March lifted above consensus rising by 0.7%m/m (vs 0.6%) to 3.3%Y/Y, though the full impact of the energy shock will come through household electricity and gas prices in later months. Core CPI eased a touch to a 3.1% annual pace, and that likely means the BoE will retain its wait-and-see stance at next week's meeting. Labour market weakness has been a key concern for the BoE, but there was some better news on that front. The unemployment rate declined to 4.9% from 5.2%, while earnings growth (ex-bonuses) also cooled to a 3.6% annual rate.

Macro (Re)View (17/4) | Green light on reopening

Market optimism on a reopening of the Strait of Hormuz has (temporarily at least) been validated, with Iran agreeing to allow the passage of commercial vessels. This applies for the 10-day ceasefire in Lebanon (to around April 22), though it is a firm step towards de-escalation that markets have priced in. Front month crude oil futures fell to around $85/bbl (lows since March 10) to close the week. Equities continued to climb ahead of the reopening announcement - and a little more after it - sending the US to record highs, while Europe was not far below its own peaks. The Australian dollar led advances against the USD and rates repriced dovishly.     

The Fed's Beige Book for April noted that activity across most US districts expanded at a 'slight to modest' rate. Amid the uncertainty associated with the conflict, the survey picked up that many firms were taking a wait-and-see approach, holding off from hiring, pricing and investment decisions. Higher prices for energy and fuel (as well as other inputs such as freight and fertiliser) were compressing profit margins. Employment levels were described as 'steady to slightly up', citing no discernable AI-related impacts.

Policymakers from the BoE and ECB attending the IMF meetings in Washington delivered plenty of headlines. Governor Bailey from the BoE again pushed back on market pricing for multiple rate hikes saying the UK economy was experiencing a 'very big energy shock' and that the best approach was to avoid rushing into judgements on what the appropriate response was. BoE Chief Economist takes a notably more hawkish stance, openly criticising this more patient approach. For the ECB, President Lagarde's comments were similarly aligned to Bailey's, highlighting a preference to proceed with a cautious and data-dependent approach. Executive Member Schnabel said the ECB was well placed having previously returned inflation to the 2% target without causing a recession. While considered a hawk, Schnabel said that the energy price shock will hit growth and weaken the ability of firms to pass through higher input costs to households.  

A solid Australian labour force report for March kept markets pricing in a high probability (around 70%) of a third consecutive 25bps rate hike in May. Comments from RBA Deputy Governor Hauser this week were also a factor. However, the confidence measures in the Westpac-MI consumer sentiment report (April) and the NAB Business Survey (March) have collapsed amid the current situation, highlighting risks for an RBA tightening into an uncertain outlook.  

Labour market tightness has been central to the RBA's hiking cycle, a narrative broadly reaffirmed by the March report as the unemployment rate held steady at 4.3%, matching expectations. A slight reduction in the participation rate to 66.8% allowed modest jobs growth of 17.9k (20k expected) to absorb the inflow of workers to the labour force (reviewed here). 

Speaking in the US this week, the RBA's Hauser said the fuel crisis added to the list of supply shocks that were pushing up inflation while weighing on growth. In that backdrop, while the RBA seems to want to hike further - especially if it sees signs that inflation expectations are moving up - he said there was a judgment call to make around the extent to which slower growth would help to ease capacity and inflationary pressures.   

Australian employment 17.9k in March; unemployment rate 4.3%

Australia's unemployment rate remained at 4.3% in March, matching market expectations. Employment increased sufficiently (17.9k) to absorb the number of new entrants into the labour market. The RBA has highlighted labour market tightness as a key factor in its current tightening cycle, delivering 25bps hikes in February and March. With today's report reinforcing that narrative, a May hike remains live - though there are clear risks to the labour market amid the conflict and its associated economic impacts.      

By the numbers | March

• Employment increased by a net 17.9k, just below expectations for a 20k rise. February's gain was revised up to 49.7k from 48.9k reported initially. 
• Unemployment remained at 4.3%, as expected, while underemployment (5.9%) was also unchanged; however, total underutilisation ticked up from 10.1% to 10.2%. 
• Labour force participation declined to 66.8% from a 4-month high of 66.9% in February. The employment to population ratio remained at 64%. 
• Hours worked rose 0.5% in March, rebounding from a 0.2% fall in February, to be up by 2.5% over the year. In the March quarter, hours worked increased by a solid 0.9%. 

The details | March

Employment rose for the 4th month in succession, increasing by a net 17.9k in March. Full time employment (52.5k) drove all of the gain, while part time employment fell (-34.6k) - the inverse February's composition (full time -27.7k/part time 77.3k).   

Following gains of 25.6k in January and 49.7k in February, the 17.9k rise in March saw employment increase by 93.1k in the March quarter - the strongest quarterly outcome since Q3 2024. This also put the 3-month average for employment at a respectable 31k. Overall, this indicates momentum in hiring was solid ahead of the headwinds to come from the fuel crisis and the RBA's tightening cycle. 

Labour market slack was little changed over the March quarter. The unemployment rate averaged 4.2%, down slightly from the December quarter (4.3%) and below the 4.3% level the RBA forecasts it to reach by mid-year. Both underemployment (5.9%) and underutilisation (10.1%) were in line with their December quarter averages. For a hawkish RBA running a narrative of a tight labour market, there is no reason to think there will be any shift in this regard.  

Labour supply is off the levels seen at its highs early last year - though amid renewed cost of living concerns, it could push higher again. The participation rate stood at 66.8% in March, in line with its average for the quarter. This compares to cycle highs just above 67%. Meanwhile, the employment to population ratio (the share of Australians in work) remains close to historic highs. 

A 0.5% rise came through for hours worked in March, after a modest decline in the prior month (-0.2%) and a solid gain in January (0.6%). Overall, hours worked lifted at a solid 0.9% pace for the March quarter, slightly outpacing the growth in employment (0.6%).   

In summary | March 

Today's report broadly aligned with consensus expectations, while it also likely serves to reinforce the RBA's existing views around labour market tightness. The May meeting is live for a third consecutive 25bps hike if the more hawkish majority of a split Monetary Policy Board continues to get its way. Quarterly inflation data for March on April 29 is the next key input to watch.

Preview: Labour Force Survey — March

Australia's Labour Force Survey for March is due today (1130 AEST). The RBA has raised the cash rate to 4.1% following back-to-back 25bps hikes, with its focus firmly on the inflation side of its mandate. However, the labour force report is still key ahead of the May meeting, where current pricing indicates the door is open for either another hike or a hold. The unemployment rate is expected to remain at 4.3%, after rising from 4.1% in January, while employment is forecast to increase by 20k.        

March preview: Employment trend key to RBA tightening cycle  

The unemployment rate is forecast to hold at 4.3% (range: 4.2-4.4%) in March, alongside an unchanged participation rate of 66.9%. Employment is expected to increase by 20k, with estimates ranging from 5-35k. As the chart below shows, employment (green line) is on a run of upside surprises relative to consensus (yellow line). 

If that trend continues, the RBA's narrative around labour market tightness, a central theme to its hiking cycle, is easier to sustain - even if the unemployment rate ticks up. By contrast, if employment starts to falter alongside a rise in the unemployment rate, tightening becomes harder for an already split Monetary Policy Board. Business and consumer sentiment surveys published on Tuesday have predictably collapsed amid the current situation, highlighting risks to employment in the months ahead.       

February recap: Unemployment rises; employment surges 

The unemployment rate rose unexpectedly from 4.1% to 4.3% in February - despite employment topping all estimates after surging by 48.9k (vs 20k forecast). The key factor was a rebound in the participation rate to a 4-month high (66.9%), resulting in growth in the labour force (83.9k) outstripping employment to drive the unemployment rate higher. The gain in employment was driven entirely by part-time employment (79.4k), while full time employment fell (-30.5k).   

Although the broader underemployment rate - including workers wanting additional hours - was steady at 5.9%, the rise in unemployment added to overall slack in the labour market - including unemployed and underemployed workers - increasing from 10% to 10.1%. 

Hours worked declined by 0.2% in April, but annual growth held at 1.6%. This followed gains of 0.4% in December and 0.6% in January - unusually strong outcomes for the summer holiday period. 

Macro (Re)View (10/4) | Ceasefire unlocks rally

Equities soared this week and risk-sensitive currencies rallied following the Middle East ceasefire, as Brent oil futures (June) fell almost 14% to 4-week lows below $95/bbl. This is still a significant premium to its $60-70 trading range through January and February ahead of the conflict, reflecting uncertainty over how flows through the Strait of Hormuz will now unfold during the next couple of weeks. The largest equity gains came in Asia (net oil importers), while the US and Europe rallied for the second consecutive week. Higher oil prices are starting to impact inflation figures; however, hawkish expectations for rate hikes continue to ease. 

US inflation rose 0.9%m/m in March (as expected) as fuel prices recorded a record increase of 21.2%m/m. That drove the annual rate from 2.4% to 3.3% (highest since May-24), though markets expected a 3.4% figure. However, there was little sign of a broader spillover into prices as core CPI undershot expectations at 0.2%m/m (vs 0.3%), firming from 2.5% to 2.6%yr (vs 2.7%). The conflict ceasefire allowed markets to begin repricing Fed easing this year, with the CPI figures then giving it a further nudge, currently sitting at around 10bps of cuts. The FOMC minutes from the March meeting indicated the Committee would be patient in cutting rates amid the energy shock pushing inflation higher; however, consumers are clearly feeling the strain. Consumption data in February was weak - personal spending was softer than expected at 0.5%/m (nominal) and 0.1%m/m (real) - while the University Michigan Sentiment index fell to a record low (47.6) in March. 

In Europe and the UK, final PMI reads for March confirmed cooling growth and upside risks to inflation from higher energy prices. The euro area index (50.7) registered a 10-month low and the UK's posted its weakest expansion in 6 months. Amid energy and supply disruptions, firms were facing higher input costs while order books and confidence were also suffering. Rate hike pricing has pared back in both regions this week, though markets still lean towards the ECB and BoE raising rates by year-end.     

Lacklustre Australian household spending data ahead of the fuel price shock and back-to-back rate hikes has cast doubt over the RBA's excess demand narrative. Spending in February was only able to post a 0.3% rise, matching January's modest gain - on track for its softest quarter since the second half of 2024 (reviewed here). Annual growth was little changed at a 4.6%yr, a level pace with growth in both discretionary and non-discretionary categories - though there has been a strong leaning towards services spending (6.2%) over goods (3.1%).