Macro (Re)view (6/2) | Hawkish RBA supports AUD

The postponement of the key nonfarm payrolls release for January until next week left markets with second tier US data and reporting results to focus on. Tech-related plays hit US and Asian equities this week on concerns that capex plans are escalating amid uncertainty over the return on investment from AI infrastructure. This was a factor in the USD seeing a modest rebound (still down 9.6% on 12 months ago) - though the local AUD remained supported following a hawkish hike from the RBA - while the BoE was dovish in holding and the ECB offered little resistance to euro strength. Next week's highlight is that delayed US payrolls report (Wed) as well as CPI data for January (Fri).    

A largely uneventful ECB meeting saw the Governing Council leave rates hold - the key depo rate remaining at 2% - with President Lagarde reaffirming the existing view that policy settings are 'in a good place'. The main interest was whether any cracks would emerge in that stance given the strength in the euro - ostensibly a headwind for growth for the export-oriented euro area economy. But at the post-meeting press conference Lagarde downplayed the effect of the exchange rate, pointing to the fact that EUR/USD was currently around its average level since its inception. Market pricing was unchanged for the ECB to remain on hold through the year. 

In another tight decision (5-4 majority), the BoE went back to holding rates (3.75%) after cutting by 25bps in December. Pre-existing market pricing for a June rate cut was vindicated as the statement noted 'Bank Rate is likely to be reduced further', while new forecasts in the quarterly Monetary Policy Report were unambiguously dovish. The outlook for growth and the labour market were downgraded, and inflation is now expected to undershoot the 2% target in 2027 and 2028. Governor Bailey at the post-meeting press conference said the key judgement underpinning the view that there was scope for lower rates reflected diminishing inflationary pressures. Softer demand conditions and an easing labour market are expected to see wage growth continue to ease, while the impact of the National Insurance increase will also fade out.     

The RBA hiked the cash rate by 25bps to 3.85% this week, recent data convincing the Board that the economy was more capacity-constrained - and inflation pressures were more persistent - than previously thought. New forecasts in the Statement on Monetary Policy helped shape that assessment. The inflation outlook was raised to be above the midpoint of the 2-3% target band through the next couple of years, with the labour market now expected to be tighter and growth stronger in the near term. A hawkish repricing followed as markets adjusted to the scenario of the RBA potentially hiking twice more this year, up from the single additional hike already priced.  

The key shift in the Board's thinking was that there was an excess demand component to inflation overshooting the target (3.6% headline and 3.4% core), adding to the existing pressures from price rises deemed more temporary - such as electricity with government rebates ending. Governor Bullock's comments at the post-meeting press conference and at the parliamentary testimony later in the week indicated the Board will retain its existing strategy, using monetary policy to gradually turn the tide on inflation in order to preserve the labour market. Markets therefore think back-to-back hikes are unlikely, pricing in the next increase in the cash rate for the May meeting. For more on this week's meeting, please see my review here. Also in Australia this week, data updates for December showed a pullback in dwelling approvals (see here) and a widening in the monthly trade surplus (see here). 

Australia's trade surplus widens to $3.4bn in December

Iron ore exports drove a widening in Australia's trade surplus to $3.4bn in December - though that was slightly below expectations ($3.5bn). Resurgent demand, a key factor in the RBA hiking rates on Tuesday (see here), was reflected in a sharp rise in import spending in the December quarter (4.2%), compressing the quarterly trade surplus to $10.3bn - its lowest level in more than 5 years. 

Australia's trade balance - the spread between export earnings ($44.6bn) and import spending ($41.3bn) in goods trade, both in AUD terms - was in surplus to the tune of $3.3bn in the month of December, up from $2.6bn in November. The trade surplus remained on its narrowing trajectory in 2025. This continued the descent from the extraordinarily high levels reached during the pandemic recovery when export revenue flooded into government and company coffers as commodity prices soared and borders reopened. In the December quarter, the trade surplus was $10.3bn - down from $14.9bn in Q4 2024 and settling at its lowest level since Q3 2020. 

Export revenue increased by 1% in the month of December to $44.6bn, up 3.7% on 12 months earlier. The key movement was metal ores and minerals (predominantly iron ore), with the value of those exports rising by 3% to $14.2bn. ABS data indicated this uplift reflected a large rise in shipments to offshore markets, as prices of the commodity were recorded to have fallen in December. Meanwhile, rural exports - including meat and other produce - rose for the third month running (2.5%), lifting to a new record high of $7.1bn. Non-monetary gold exports notched back-to-back declines in December (-0.9%) but still had a stellar year, with exports more than doubling (107.9%) on the back of safe-haven demand and central bank buying.   

For the December quarter, exports rose by 3.3% - remarkably this was their strongest quarterly movement since Q2 2022 - to come in at $134.8bn, an elevated level but well off the record highs around $155bn a few years ago. The rise in quarterly exports looks to be almost entirely price-driven; the ABS reported last week that export prices increased by 3.2% in Q4. 

Spending on imports declined by a modest 0.8% in December to $41.3bn, which followed a 0.2% fall in November. But those movements belied the broader trend in the quarter, which saw spending accelerate by 4.2% - its fastest quarterly rise since Q3 2022 - to a record high of $124.5bn. According to the ABS, import prices were only up by a moderate 0.9% in Q4 - indicating that rising demand was the key factor behind the acceleration in spending. 

Consumption goods rose by 2.2% in the quarter on the back of gains in categories such as food (3.9%), clothing and footwear (0.9%), household appliances (0.9%) and vehicles (0.4%). Capital goods - associated with business investment - slowed (-0.9%) after surging in Q3 (4.1%). Meanwhile, intermediate goods posted a 3.4% rise in Q4 - despite a fall in fuels and lubricants (the largest category) as oil prices declined.   

RBA hikes cash rate in February

The RBA hiked the cash rate by 25bps to 3.85% in a unanimous decision by the Monetary Policy Board at today's meeting in Sydney. Inflation moving further above the 2-3% target band reinforced the RBA's concerns that capacity pressures are arising amid robust demand and labour market conditions, prompting today's hike. And more are likely to follow. The RBA lifted its inflation forecasts - core inflation is expected to remain above the midpoint of the band over the next couple of years - leading markets to price in price in two further rates hike this year - one more than previously expected. If delivered, that would reverse the RBA's three rate cuts from 2025.  

 

Today's meeting proved to be more hawkish than markets had expected - despite a rate hike being widely touted. Markets came into the meeting pricing in two rate hikes this year, but new forecasts published in the Statement on Monetary Policy - that factored in that outlook for interest rates - still showed materially higher inflation was now the base case for the RBA. Forecast inflation this year was lifted from 3.2% to 3.6% in headline terms and from 2.7% to 3.2% on a core basis. Upward revisions were also seen in the forecasts for 2027 (2.7% from 2.6% for both measures), with inflation still remaining slightly above the midpoint of the band into 2028 (2.6% headline and core). Furthermore, the forecasts also signalled a stronger near-term growth outlook and tighter labour market conditions are now expected by the RBA. 

In response, markets now expect a total of three rate hikes this year - the next two most likely going through at the quarterly 'forecast' meetings in May and August. At the post meeting press conference, Governor Bullock said the overall strategy of returning inflation to target without coming at the expense of its full employment objective was still guiding the Board - pointing to a gradual tightening cycle this year. That said, the reacceleration in inflation over the back half of last year has clearly surprised the RBA, as has the strength in the economy and the labour market.  

Last week's December quarter CPI data confirmed a further overshoot of inflation to the target band: headline inflation lifted to 3.6% year-on-year and the core rate rose to 3.4% year-on-year. Governor Bullock attributed part of the inflation overshoot to temporary price increases (such as electricity rebates unwinding and holiday travel) but also said that inflationary pressures in other parts of the basket (services and new dwellings) were more likely to persist. 

Elevated inflation indicated to the Board more generally that the pick-up in private demand from household spending and business investment was testing the supply capacity of the economy after years of weak productivity growth. That was backed up by GDP growth surprising to the upside at 2.1%Y/Y in Q3, while the labour market had remained tighter than expected - the unemployment rate averaged 4¼% in Q4, defying the RBA's November forecast to rise to 4.4%.   

On Friday (0930 AEDT), Governor Bullock and other RBA officials are set to appear for a parliamentary testimony hearing. The next RBA monetary policy meeting is scheduled for 16-17 March. 

Australian dwelling approvals unwind in December

Australian dwelling approvals fell more than expected in December (-14.9%) after rising sharply in November (13.1%), with volatile unit approvals (-31.6%) driving the swing. House approvals remained broadly flat (0.3%). Approvals lifted to almost 50k in the final quarter of 2025 - their highest quarterly total in 4 years - but were still well below the peaks of earlier cycles. Three rate cuts supported dwelling approvals in 2025, but if the RBA starts to reverse course as early as at today's meeting with a 25bps hike, approvals would likely be under pressure again - though on the other hand, housing prices continue to rise reflecting the tight demand-supply balance.  

Dwelling approvals were down 14.9% in December - far exceeding the expected decline of 6.4% - in another volatile result from this series. This followed a 13.1% surge in November after a 4.9% fall in October. Across the final 3 months of 2025, approvals came in at 49.9k - their highest quarterly total in 4 years after rising by 3.6% on the September quarter (48.2k). Unit approvals defied month-to-month volatility to rise by 7% in the December quarter (21.2k) to be around their highest levels seen since 2018. Quarterly house approvals lifted by 1.2% to 28.7k.  

The value of residential alteration work approved was down 1.4% in December ($1.2bn) but rose by 2.2% across the final quarter of the year. According to the September quarter national accounts, the volume of alteration work completed had risen by more than 7% through the year, indicating that demand has been the main component - rather than inflation - driving approvals.  

Preview: RBA February meeting

The RBA's Monetary Policy Board looks set to deliver a 25bps rate hike at today's meeting (decision due 1430 AEDT). This would lift the cash rate to 3.85%, reversing one of the three rate cuts delivered in 2025. The Board came into the year having effectively signalled the end of the easing cycle at the previous meeting in December, highlighting upside risks to inflation and uncertainty over the restrictiveness of policy settings. Recent data have reinforced that caution: inflation has moved further away from the 2-3% target band, while domestic growth and the labour market have surprised to the upside. This has led to a hawkish repricing of the RBA rates outlook, with two rate hikes now priced in this year - including a 70% chance of a hike today - compared to expectations for one further rate cut as recently as November.       

Last week's December quarter inflation report strengthened expectations for a rate hike today. While quarterly inflation slowed after surging in the September quarter - which the RBA largely attributed to temporary price rises - annual inflation continued to drift away from the midpoint of the 2-3% target band. Headline CPI moved up from 3.2% to 3.6% year-on-year, while the core or trimmed mean rate lifted from 3% to 3.4% year-on-year, with both measures exceeding the RBA's November forecasts (headline CPI 3.3% and trimmed mean 3.2%). For today's decision, the key issue is not the inflation overshoot by itself but rather what it implies about economic conditions more broadly. 

If the Board hikes today, its messaging is likely to emphasize that demand conditions have strengthened relative to the economy's supply capacity, putting upward pressure on inflation. Household spending and business investment lifted GDP growth to 2.1% year-on-year in the September quarter - already slightly above the RBA's year-end forecast for 2%, a pace it estimates to be around Australia's potential growth rate. Meanwhile, labour market conditions have remained tighter than the RBA was expecting. The unemployment rate averaged 4.2% over the final quarter of 2025 - defying the RBA's forecast to rise to 4.4%. 

Alongside today's decision, the RBA will publish new forecasts in the Statement on Monetary Policy - a key input for markets in assessing the rates outlook. The data (as discussed) indicates the RBA is likely to raise its inflation forecasts, while nudging up its outlook for growth and lowering its projection for the unemployment rate. But the forecasts will also take into account much more hawkish assumptions from higher interest rates and a stronger Australian dollar than compared to the November forecasts - factors that will weigh on the outlook for growth and inflation. That could set a high bar for a further hawkish repricing following the decision, unless Governor Bullock surprises at the post-meeting press conference. 

Macro (Re)view (30/1) | Volume gets louder

Markets were largely a headline-driven mess this week, with gold and silver at the epicentre of some volatile moves, surging to record highs before pulling back. Ongoing tariff (Greenland) and geopolitical tensions (Iran and Venezuela) and weak US dollar sentiment continued as key drivers. US equities were flat to soft following mixed earnings from 4 of the Magnificent 7 as Asia continued to outperform on AI-related gains. The USD index fell to 4-year lows, despite Fed Chair Powell signalling increased confidence in the outlook for the US economy as the FOMC left rates on hold (3.5-3.75%), while Q3 GDP growth was revised up to 1.1% quarter-on-quarter, its fastest in 2 years. Some stabilisation came from President Trump's nomination of Kevin Warsh to succeed Powell at the Fed when his term concludes in May. 

Warsh was regarded as an inflation hawk having previously served as a Fed governor (2006-2011), though recent statements indicate a preference towards lower interest rates, aligning with Trump's views. The confirmation of Warsh to the post is set to face some hurdles, notably from Senator Tillis who has vowed to oppose any nomination until the investigation into Chair Powell by the Department of Justice has run its course.  

The local AUD remains a key beneficiary of USD weakness, rising north of 0.70 to highs since early 2023. Support has also come from domestic factors after strong Q4 inflation data (see here) upped market odds for an RBA rate hike at next week's meeting to around 70%. Headline CPI rose 0.6% in the December quarter to 3.6% over the year (prior 3.2%) and the key trimmed mean or underlying measure was 0.9% in the quarter and 3.4% over the year (from 3%). Those outturns put inflation above the RBA's 2-3% target band and were higher than the central bank's forecasts.  

Australian Q4 CPI 0.6%, 3.6%Y/Y

Australia's latest inflation data has come in on the firm side of expectations, but to a mixed reaction by markets. While pricing for an RBA rate hike in February lifted from around 60% to 70%, the 3-year government bond yield was 4-5bps lower and the Australian dollar softened from multi-year highs overnight. In my view the muddled reaction reflects what has unfortunately turned out to be a rather messy transition from quarterly to monthly inflation data. Markets were cued up for quarterly figures that the RBA has said it will continue to set policy to, but the ABS focused its reporting on its new monthly format. 

Markets had to dig deep into the release to find those key quarterly figures. In the December quarter, headline CPI was 0.6% - well down from the 1.3% acceleration in the September quarter - but base effects lifted the annual pace from 3.2% to 3.6% - its highest since the June quarter of 2024. Market forecasts were around the money at 0.6%q/q and 3.5%Y/Y. Meanwhile core or trimmed mean CPI was 0.9% for the December quarter, only a touch softer than the 1% increase in the September quarter. The annual pace rose from 3% to 3.4%. Both quarterly and annual trimmed mean were hotter than the market's forecasts for 0.8%q/q and 3.2%Y/Y. 

 

Importantly, the latest inflation numbers have come in above the RBA's forecasts, which were for headline CPI of 0.5%q/q and 3.3%Y/Y and trimmed mean of 0.8%q/q and 3.2%Y/Y. While those forecasts are dated (they will be updated in February), the central bank has been talking about the risk of inflation surprising to the upside. And that is what has played out. The increase in market pricing for a February hike is justified because the Monetary Policy Board may take higher-than-expected inflation as an indicator that demand conditions (including household spending and the labour market) are starting to put upward pressure on prices. The RBA had attributed the surge in inflation in the September quarter largely to temporary factors; however, even if some of the large price increases were not repeated in the December quarter, inflation has still come in a bit higher than anticipated.  

An opposing viewpoint is that the RBA may show patience due to significant volatility in the inflation data, a situation now amplified by the switch from quarterly to monthly data. Electricity prices for example are up 21.5% over the year as government rebates have unwound, while there have a been other outsized price increases of late such as property rates and in holiday travel, the latter heavily influenced by seasonality. Overall, today's inflation numbers make the RBA a bit more likely to hike in February, but a hold cannot be completed ruled out. 

Preview: Australian Q4 CPI

Australia's December quarter inflation report is due today (1130 AEDT). Although the ABS transitioned to monthly inflation reports late last year, it continues to produce its long-established quarterly series. The RBA has made clear that the quarterly data will remain its main focus in assessing inflation and guiding monetary policy decisions. Renewed inflationary pressures lifted headline CPI through the top of the RBA's target band (2-3%) in the September quarter, while core inflation touched 3%. Meanwhile, strong labour market data last week showed the unemployment rate fell back to 4.1% in December. Those factors have market pricing close to evenly split between a hike and a hold from the RBA at its February meeting, with today's report shaping as the key variable upon which the decision could swing.   

December quarter preview: Quarterly inflation expected to slow  

Inflation is forecast to ease back in the December quarter, with a range of outsized price increases from the September quarter not expected to repeat. Quarterly headline CPI is expected to slow to 0.6% (forecast range: 0.2-0.8%) - down from 1.3% in the September quarter - but with the annual pace rising from 3.2% to 3.5% on base effects. On a core or trimmed mean basis, a 0.8% quarterly rate is expected (range: 0.7-1%), lifting the annual pace from 3% to 3.2%. Based on the most recent inflation readings for November, headline CPI was running at 3.5%yr and the trimmed mean was 3.2%yr.

The market forecasts broadly align with the outlook the RBA published in its most recent Statement on Monetary Policy last November. The RBA's forecasts are for headline CPI of 0.5%q/q and 3.3%Y/Y, with the trimmed mean at 0.8%q/q and 3.2%Y/Y - though it has been wary of upside surprises to this outlook as the monthly reports for October and November have come in. That has seen the RBA become more hawkish in its communication, effectively signalling the easing cycle has concluded.  

September quarter recap: Inflation back to top of RBA target band 

Annual inflation reaccelerated back to the top of the RBA's target band in the September quarter, rising from 4-year lows in the June quarter. Headline CPI rose by 1.3% in the quarter (up from 0.7% in the previous quarter), surging from 2.1% to 3.2% over the year. Trimmed mean inflation increased by 1% in the September quarter (0.7% prior), firming to a 3% annual pace from 2.7% previously. 

Higher quarterly inflation was driven by a range of factors. A notable rise in services inflation (1.3%) was key, with rents again up solidly (1%) and property rates and charges seeing their largest quarterly jump (6.3%) in 11 years. Travel costs - both domestic (3.2%) and international (2.7%) - were also influential. Meanwhile, other key inflation drivers were electricity prices (9%) following annual price reviews and government rebates ending and new dwelling costs (1.1%).

Macro (Re)view (23/1) | Markets Sidestep Tariff and JGB Turmoil

Markets got away relatively unscathed from what might have been a damaging week amid new trade and geopolitical tensions and a significant JGB market selloff. Risk assets rebounded after President Trump confirmed at the Davos forum that the tariffs threatened last weekend on eight European countries (including the UK) had been averted for now by the framework agreement over Greenland, though the details are limited. Meanwhile, Japanese bond yields steepened sharply on fiscal sustainability concerns (30s +16bps this week), but the spillover to other regions ended up fairly contained. In FX, higher rates gave support to an ailing JPY as the BoJ left policy on hold, but the standout was the local AUD. Key factors to AUD strength were the broader risk rebound and strong domestic labour market data, which boosted RBA February rate hike pricing to around 50%.    

Data release in the US took a back seat to events in Davos and had little market reaction. The Fed is firmly expected to remain on hold at next week's meeting, a stance reaffirmed as the core PCE deflator - its preferred inflation metric - firmed as expected from 2.7% to 2.8%yr in November. Fed forecasts updated late last year showed an expected decline to 2.5% over the course of 2026 before settling around the 2% target in 2027. Data on the consumer was solid with Black Friday sales boosting personal spending by 0.5% in November and 0.3% in real terms. Real spending in annual terms is now tracking at 2.6%, moderating from a 3.2% pace a year earlier.

In the UK, headline CPI inflation lifted a touch from 3.2% to 3.4%yr in December, above the 3.3%yr consensus due largely to temporary factors (tobacco taxes and holiday travel). More importantly from a Bank of England standpoint, core inflation at 3.2%yr and services inflation at 4.5%yr were below its forecasts and 0.1ppt under market expectations. Meanwhile, softness in the labour market was highlighted by unemployment printing at an unchanged 5.1% in November - up from 4.4% a year ago - and wages growth (ex-bonuses) slowing to a 4.5% annual pace, its lowest since early 2022. This all supports continued BoE easing, with two rate cuts expected in 2026.  

  

Resurgent employment growth of 65.2k drove Australia's unemployment rate down to a 7-month low of 4.1% in December as the labour market rediscovered form at the end of 2025 (see here). A hawkish repricing of the RBA outlook followed the report, a February rate hike now considered a line-ball call and a lock by May. The deciding factor will likely be next week's December quarter CPI report, with the RBA more concerned about renewed inflationary pressures than the labour market overheating. The December labour market update is also likely to be seen in the context of an indifferent run through much of the back half of 2025.

The 65.2k rise in employment was well above the 27k figure expected, rebounding off a 28.7k fall in November. This was the strongest gain in 8 months, with the full time segment (54.8k) leading the way. That made inroads into the unemployment rate, which fell from 4.3% to 4.1% - its lowest since May - but was assisted by only a modest rise in the participation rate to 66.7%. Nonetheless, sizeable declines in the underemployment rate from 6.2% to 5.7% and in total underutilisation from 10.5% to 9.8% - a 2½-year low - were clearly consistent with a broad retightening of labour market conditions.