Australia's trade surplus $2.8bn in September

Australia's trade surplus lifted modestly from $2.6bn to $2.8bn in September, its widest in 7 months, defying expectations to narrow to $1bn. Exports rose 2.3% in the month on the back of strength in the commodities complex, reaching their highest level since March 2023. That contrasted with a 3.3% fall in imports - their 3rd decline in the past 4 months - with the renewed pressures on global oil prices yet to impact fuel imports.    

 

The monthly trade account was in surplus by $2.8bn in September, with exports ($48.4bn) exceeding imports ($45.6bn). It averaged a surplus of $1.5bn over the past 3 months, while it was in surplus by $4.5bn over the quarter. Australia has seen its trade surpluses compress notably this year, and was in fact in deficit in March and May for the first time in around a decade. The AI-related investment boom has seen imports surge, while higher fuel prices due to the conflict in the Gulf have also played a role. However, exports hit back in the latest quarter to some degree rising by 2.6% to $141.7bn, outpacing a broadly flat result (0.2%) for imports ($137.2bn).  

In September, exports lifted by 3.3% to $48.4bn (10.4%yr). The key driver was non-rural goods (2.8%) as most of the major commodities (excluding coal -3.5%) saw gains: LNG 6.6%, metals 23.5%, and iron ore 2.3%. The chart below shows quarterly commodity exports, with LNG, or 'other mineral fuels' (pink line), ramping sharply of late on the back of the rise in global energy prices caused by the Gulf conflict. A 3.6%m/m rise in rural goods, driven by meat (11.3%), also supported the lift in exports.   

Monthly imports fell by 3.3% to $45.6bn but are still up by almost 12% since September last year. Aside from a large decline in volatile non-monetary gold (-34.7%), the overall weakness reflected falls in consumption (-2.2%) and capital goods (-2.5%). Car imports (-4%) weighed most on consumption goods, while capital goods - the category that has been boosted by the AI-related upswing - declined as aircraft orders pulled back (-33.7%) after recent gains. Intermediate goods were up modestly (0.9%) but are set to rise much more sharply on the back of the renewed rise in global oil prices, as they did earlier in the year after the conflict escalated. 

Australian household spending rises in September

Australian household spending rose by a stronger-than-expected 0.6% in September, rebounding from a weak month in August (-0.1%). Higher fuel prices boosted spending, while travel and leisure spending was also strong alongside the AFL and NRL finals series. Sales volumes increased at a solid pace (0.7%) over the quarter, reflecting the resilience of household demand; however, the RBA has effectively hiked rates twice since then, with its September hike coming on the final day of the month, followed by yesterday's rate rise (see here).  

Household spending increased by 0.6% month-on-month in September - well above the 0.2% rise that was expected - and 6.8% over the year. A downward revision adjusted the result in August from flat (0%) to a modest fall (-0.1%), after spending rose sharply in July (1%). 

Gains in the health (1.5%) and recreation and culture categories (0.8%) were the key factors behind the rebound in September. Health spending was supported by increased consultations as the flu season came late on. The AFL and NRL finals through September boosted spending on travel, gambling and electronic goods. Strong ticket sales for upcoming concerts were also a factor. 

Meanwhile, spending on fuel rose 5.4% in September as fuel prices reaccelerated due to the conflict in the Gulf continuing and with the fuel excise tax cut having ended in August. 

For the September quarter, volumes (or spending adjusted for inflation) increased by 0.7%, following similar sized gains in recent quarters. Volume growth increased from 2.5% to 3.2% year-on-year, its fastest pace since early 2023.  

Volume gains were broadly based in the September quarter, with transport (1.6%) and clothing and footwear (1.2%) leading the way. Hotels, cafes and restaurants fell very slightly (-0.1%), while alcohol and tobacco (-1.2%) continued to contract - though that is affected by underreporting due to the well documented rise in illicit tobacco sales.     

At yesterday's meeting, the RBA made a modest downgrade to its outlook for household consumption growth this year from 1.6% from 1.4%Y/Y. Risks are weighted heavily to the downside given the lagged effects from the RBA's 5 rate rises have yet to play through, while the housing market downturn is also showing no signs of slowing. 

RBA hikes cash rate by 25bps in November

The RBA hiked the cash rate by 25bps to 4.85% at today's meeting, the 5th time it has raised the key rate this year. Once again, the RBA lifted its inflation forecasts in the Statement on Monetary Policy, pushing back the expected return of inflation to the 2-3% target band from early to mid 2028. The major surprises were the 6-3 vote split from the Board and policy guidance that was watered down by removing the reference to 'increasing the cash rate target further'. The market reaction to those developments was notable. Pricing for another hike this cycle fell from around a 40% chance to 20%, the 3-year government bond yield declined 8bps to close at a 2-month low (4.77%), and the Australian dollar weakened.       

The themes that accompanied today's hike were consistent with the RBA's hawkish messaging going into the meeting around upside risks to inflation coming to fruition. Persistent conflict in the Gulf had kept oil prices elevated, with signs that was now spilling over to a broader range of prices. In addition, Governor Bullock at the post meeting press conference highlighted that capacity pressures in the domestic economy had been more significant than previously thought. 

The inflation outlook this year was lifted materially from 3.6% to 4.5% on a headline basis and from 3.3% to 3.6% in underlying terms. Both headline and underlying inflation is then expected to slow over 2027 to 2.7% and 2.9% respectively (both revised up from 2.6%), before eventually returning to the middle of the 2-3% target band in mid 2028, around 6 months later than previously forecast.   

Interest rates were already seen as restrictive ahead of today's meeting and this latest hike has made financial conditions a little tighter. The effect of restrictive policy is set to weigh on the growth outlook, which is expected to run at a below trend pace across the forecast horizon. Growth this year is now expected to be 1.6%, a little stronger than previously expected (1.4%); however, downward revisions were made to forecast growth in 2027 (1.3% from 1.6%) and 2028 (1.5% from 1.8%). 

As a result, the unemployment rate is now expected to rise more quickly and to reach a higher peak of 5.1% in 2028. If there are signs that this outlook for slower growth and a softer labour market is beginning to play out, markets will look to start pricing in rate cuts; however, they are not yet at that point. The next RBA meeting is on 7-8 December.

Preview: RBA November meeting

The RBA is widely expected to hike the cash rate by 25bps to 4.85% today (decision due at 1430). Hawkish RBA commentary and Q3's inflation report have combined to lift market pricing for a hike at this meeting to around an 80% chance, up from around 50% after the September meeting. Although the RBA has already hiked rates four times this year - a far more aggressive stance than the likes of the Fed and ECB - it is not yet ready to throw in the towel on its tightening cycle. The effects of the Gulf conflict and a robust domestic economy will see the RBA revise its inflation outlook up today, threatening a more prolonged return of inflation to the middle of the 2-3% target band, currently not forecast until early 2028.  

At the September meeting, the Monetary Policy Board returned a unanimous vote (9-0) to raise the cash rate by 25bps to 4.6%. The meeting minutes showed there was rising concern that elevated inflation could persist, with the conflict in the Gulf continuing to put upward pressure on energy prices and with robust demand testing the supply capacity of the domestic economy. In Q3, headline CPI was running at 3.9% year-on-year while the underlying or trimmed mean rate was 3.7% year-on-year (quarterly series). Those outcomes exceeded the RBA's year-end forecasts for 3.6% and 3.3% respectively, suggesting that its concerns over the inflation outlook may be materialising.  

While the labour market has shown some signs of faltering - the unemployment rate averaged 4.6% in Q3, a little higher than the trajectory forecast by the RBA - conditions are still broadly viewed as tight. However, it was formally noted in the meeting minutes that with inflation remaining elevated, the trade-off with the employment side of its mandate was worsening. This will be a key message for Governor Bullock to manage at today's press conference. As will the slowdown in the housing market amid another rate rise.     

Australian dwelling approvals rise 5.1% in September

Australian dwelling approvals outperformed expectations rising by 5.1% in September, well above the 2% rise forecast. However, the result was driven entirely by a surge in higher-density approvals (24.6%), hiding a large fall in house approvals (-5.3%). Approvals have trended higher over the past 2-3 years but could now be peaking given the prevailing headwinds to housing construction. 

Dwelling approvals rose 5.1% in September to 17.9k, their largest gain since June. However, that followed back-to-back falls in July (-1.7%) and August (-5.2%), leaving approvals flat over the quarter (53.1k). An influx of unit approvals (24.6%), which are volatile, drove the headline gain in September after high-rise approvals in Sydney and Brisbane surged. The underlying data showed high-rise approvals turned in their second strongest result in the past four years. Despite this, unit approvals still declined in the quarter (-1%). House or detached approvals fell 5.3% in September, their weakest result in more than a year, though they managed to scratch out a gain in Q3 (0.7%).  

Given the 4 interest rate rises already delivered by the RBA this year, and a 5th expected tomorrow, this could well be the top for approvals in this cycle. Other headwinds are also a factor. Cotality this morning reported that national housing prices continued to slide in October, bringing the correction to almost 7%. Last week, the ABS highlighted that soft demand is seeing developers increase incentives, while cost increases are also putting pressures on margins. 

Macro (Re)View (30/10) | Fed and ECB on hold; RBA to hike

Despite a strong start, US equities ended up lower this week, with the reversal sparked by the same concerns around the returns from massive AI-related investment that have gripped the market for months. The USD rose modestly (0.2%) and the Treasury curve was a little steeper. In a raft of central bank meetings, the Fed, ECB, BoJ, and, in a surprise decision, the RBNZ all left rates unchanged. The BoC hiked by 25bps, and the RBA is expected to follow suit next week.  

In the US, the Fed left rates unchanged in the 3.75-4% range. While the decision was expected and supported by a large majority of FOMC voters (10-2), broader uncertainty over the Fed's reaction function persists. In every sense, the Fed's messaging is hawkish given inflation remains 'elevated' to its 2% target - data this week showed its preferred core PCE deflator was running at 3.1%yr in September - but the statement said the FOMC opted to wait for 'the accumulation of more information' rather than hiking this week. 

This was despite its assessment of economic activity being upgraded from 'solid' to 'strong' as GDP growth accelerated in Q3 by 0.8%q/q and 2.1%Y/Y on the back of surging AI-related spending and resilient household demand. Chair Warsh provided little insight at the post-meeting press conference, emphasising the tightening in conditions following the September rate hike as evidence of its commitment to the inflation target. Warsh also announced a change to the policy schedule from next year. A vote on rates will be removed from one of the 8 meetings in 2027 (and then two in 2028) to allow the FOMC to focus entirely on strategy deliberations.  

The ECB left its key rates on hold this week. Growth in the euro area remains resilient, GDP in the September quarter rose by a stronger-than-expected 0.4%q/q and 1.3%Y/Y, though the ECB said that downside risks remain. But upside risks to inflation remain the more prominent concern, with post-meeting reporting quoting ECB sources indicating that a rate hike in December is likely. News of President Lagarde's early departure from the ECB in February, nine months before the end of her tenure, overshadowed the press conference. From a market perspective, the largest impact from the UK autumn budget played out in equities after increases in taxes on banks were smaller than expected.   

Pricing for an RBA rate hike next Tuesday rose from around 60% to above 80% this week on the back of hawkish RBA commentary and elevated inflation data for September. Whether it was chief economist Hunter's 60 Minutes appearance or the Senate testimony from the bank's top officials, the key message was that the inflation outlook had worsened recently, requiring more work to bring inflation back to the 2-3% target. Higher fuel and holiday travel costs were key drivers of headline CPI lifting by 1.3% in the September quarter and 3.9% over the year; however, a strong increase in the trimmed mean - the RBA's preferred measure - of 1% quarter-on-quarter and 3.7% year-on-year indicates that price pressures are broadly based (see here). 

Australian CPI 4.3% in September

Australian inflation continued to increase in September, with markets now pricing in around a 90% chance of a 25bps RBA rate hike next week, up from 67% yesterday. The RBA has already increased the cash rate from 3.6% to 4.6% this year after inflation turned for the worse moving further above the 2-3% target band. Today's report showed headline inflation increased by 3.9% over the year to the September quarter (unchanged from the June quarter), while the monthly data series clocked the increase at 4.3%, up from 4% previously. The RBA's preferred trimmed mean measure, which excludes the most volatile price changes, lifted from 3.6% to 3.7% in the quarterly data and rose from 3.5% to 3.6% in the monthly series, outpacing the central bank's earlier forecasts.      

Headline inflation (tracking all price changes across the CPI basket) increased by 0.8% in September and 1.3% in the quarter. Those outcomes were a little stronger than expected. Fuel prices were a major factor, up a further 9.4% in September to be 35% higher over the past 3 months. That reflects the unwinding of the federal excise tax cut as well as renewed tensions in the Gulf pushing global oil prices up again. 

Domestically, holiday travel costs picked up sharply (8%m/m) in September, responding to strong demand during the school holiday period that also coincided with the AFL and NRL finals series. International travel also saw a strong rise (7.2%m/m). 

Over the past year, housing-related costs have been the major driver of inflation rising by 5.2%; however, that pace has slowed materially since the start of 2026. The significant slowdown in the established housing market may be starting to weigh on housing construction costs, which have eased to a 4.7%yr pace from almost 6% a few months ago. Meanwhile, electricity prices have risen 12.8%yr but were increasing much more rapidly earlier this year after government rebates had ended.  

 

Preview: Australian Q3 CPI

Australia's latest inflation report is due today (1130 AEDT), less than a week before the next RBA meeting. Expectations for a 25bps rate hike at that meeting have built rapidly over recent days to a 2-in-3 chance, after senior RBA officials Hauser and Hunter indicated the tightening cycle has further with inflation remaining well above the 2-3% target band. Today's report includes the monthly and quarterly inflation figures for September.  

A recap: Inflation pressures remain elevated  

Despite softer readings for the month of August, annual inflation continued to remain elevated to the RBA's target band. Headline CPI slowed to 0.4% month-on-month after rising by 1% in July, while trimmed mean (or core) CPI posted its weakest increase (0.2%m/m) since March. However, annual inflation still lifted from 3.5% to 4% in headline terms and the core rate printed at an unchanged 3.6%. Over the past year, housing has been the major driver of inflation. That reflects cost increases associated with dwelling construction, electricity prices re-setting after government subsidies, and rising rents.  

 

The last set of quarterly figures were for the June quarter published back in July. In that release, headline inflation moderated to a 0.6% quarter-on-quarter rise, well down from the 1.4% surge in the March quarter. However, the year-on-year pace only eased modestly from 4.1% to 3.9%. Meanwhile, trimmed mean CPI came in at 0.8%q/q, unchanged from the March quarter, but ticked up from 3.5% to 3.6% year-on-year.   

September preview: Upward pressure on inflation as fuel excise tax cut ends   

Today's release sees the monthly and quarterly inflation figures for September published. The RBA places greater weight on the quarterly series because the transition to monthly CPI reports in Australia is only in its infancy. The outcomes expected are:

• Headline CPI: 0.6% month-on-month (range: 0.3-0.8%) and 1.3% quarter-on-quarter (range: 0.6-1.4%)

• Trimmed mean CPI: 0.3% month-on-month (range: 0.2-0.4%) and 1% quarter-on-quarter (range: 0.9-1%)

If those outcomes are realised, annual headline CPI would lift from 4% to 4.1% in the monthly series but hold steady at 3.9% in the quarterly figures. Trimmed mean CPI is set to hold at a 3.6% annual pace across both series. Comments in the past week from the RBA's Hauser and Hunter have steered markets towards a rate rise next Tuesday. Hauser in particular noted the inflation outlook was 'materially worse' than in August when the RBA forecast headline CPI would be at 3.6% and the trimmed mean at 3.3% by year-end.  

A key dynamic over the quarter and in September was fuel prices putting upward pressure on inflation. The federal excise tax cut ended by early August, while renewed conflict in the Gulf continued to disrupt oil supply. Those effects saw fuel prices in the monthly CPI rise by 7.5% in July and 14.8% in August. 

Macro (Re)View (16/10) | US bonds rally

Concerns over AI-related financing led to heavy declines in US and Asian equities this week. In turn, US Treasuries received a solid bid - the 10-year yield recorded its largest week decline since February this year and the 2-year segment also fell (-8bps) - despite continued inflationary pressures after Fed Chair Warsh speaking at the IMF meetings indicated there was no urgency for further hikes. Fed pricing implies only around a 15% chance of a rate hike later this month. That may have weighed on the US dollar, which fell around 0.4% for the week despite the broader risk averse tone.    

US inflation data matched expectations in headline terms but was stronger than forecast on a core basis, reflecting broad-based price increases. Headline CPI lifted 0.6%m/m and 3.7% over the year to September, up from 3.4%; however, core CPI firmed to 0.3%m/m and 2.6%yr (from 2.4%). While energy prices surged (5.2%m/m), increases across core goods (0.3%) and services (0.4%) confirmed a wide range of the basket drove the result. Additionally, producer prices lifted 1.3% in the month, well above expectations (0.5%), pointing to further inflationary pressures in the pipeline.  

The minutes of the RBA's September meeting gave further context to the Board's decision to raise the cash rate by 25bps to 4.6%, its fourth rate hike this year. Upside risks to inflation were judged to have 'materialised or were building', with global cost pressures from higher oil prices and the AI-related boom coming on top of existing domestic capacity constraints. The Board was also mindful that with markets offshore pricing in tighter policy, financial conditions at home could ease via a weaker exchange rate if it failed to move. 

On the labour market, the prevailing view was the conditions were broadly consistent with its full employment mandate; however, data this week brings that into question. Employment fell by around 39k in September, a sharp downside surprise on the 20k consensus figure (see here). Although there is some uncertainty around the data given recent survey changes, the unemployment rate now stands at 4.7% - its highest since late 2021 - while it averaged 4.6% in the September quarter, already above the RBA's year-end forecast (4.5%). Markets have priced out expectations for another rate hike this year to just a 1 in 3 chance but still see another hike coming in 2027 to conclude the tightening cycle.