Macro (Re)View (4/9) | US rates again in focus

Fed rates were back in the spotlight this week, with pricing for a September hike wound back after Governor Waller said current inflationary trends were sufficient to keep policy tightening at bay. However, that places a lot of emphasis on next week's US CPI report. Waller's comments were key to a softer USD this week (-0.5%), outweighing strong labour market data. The dollar was weakest against the JPY, so much so that there was speculation of currency intervention, though that has not been confirmed by Japanese officials. Domestically, resilient Q2 GDP growth firmed expectations for further RBA tightening, supporting the AUD.    

Comments from Fed Governor Waller around disinflationary progress were taken by markets as a contrast to Chair Warsh's address at Jackson Hole, casting doubt that the central bank is on track to hike rates. Waller said the upcoming inflation data (due Friday) would be the key factor in whether he votes to hold or hike. The labour market seems the least of the Fed's concerns following an upside payrolls report for August. Nonfarm payrolls rose 162k in the month, surging past expectations (55k), while employment over June and July was revised up by a combined 55k. The unemployment rate held at 4.1% even as participation saw a slight increase to 61.6%. Growth in average hourly earnings remained contained easing to a 3.1%yr pace from 3.2%.   

       

The ECB is set to deliver a widely expected 25bps rate hike next week, lifting the depo rate to 2.5%. Whether or not the ECB is prepared to make policy more restrictive will drive the market reaction. Economic conditions have been more resilient than expected, but there have been few signs of second-round effects on inflation. In August, headline inflation rose from 2.9% to 3.3%yr on energy prices, though core inflation eased from 2.5% to 2.4%yr - only just above the ECB's target. In the UK, BoE Governor Bailey said the central bank is committed to returning inflation to target but it has flexibility over the timeline. Markets are pricing in a BoE hike by year-end. 

Confirmation of resilient economic growth in Australia in the June quarter saw pricing for an RBA rate hike in September rise to around a 75% chance, while a full hike remains priced for November. The AUDUSD rose through 0.72 to highs since May. While on the currency, the AUD has defied a deteriorating current account deficit since 2023 (see here) to be up by around 10% in trade-weighted terms over the period. Trade data for July reported weakness for both exports and imports (see here).  

Real GDP surprised to the upside of market and RBA forecasts expanding by 0.4% in the June quarter and 2.1% through the year (reviewed here). While growth was slower over the first half of the year (0.7%) than in the back half of 2025 (1.4%), it held up better than feared from the headwinds of the fuel price shock, RBA rate hikes and a softening housing market. 

Household consumption led growth in the quarter as record EV sales boosted discretionary spending (1.4%). While sentiment was weak due to cost-of-living pressures, the fuel excise tax cut and robust labour market conditions have supported demand. Despite slowing (-0.5%), business investment has been the major driver of growth over the past year as the data centre build out has accelerated. 

Meanwhile, cycle lags mean current strength in dwelling investment (1.6%) is reflecting last year's rate cuts. A fall in dwelling approvals in July (-3.6%) may be the first signs of a turn in momentum (see here). Private demand all told has risen 3.6%Y/Y, supporting growth as public demand has slowed (1.9%Y/Y). A higher interest rate backdrop has seen government spending slow to a 3-year low. 

Australia's trade surplus narrows to $1.9bn in July

Australia's trade surplus came in at $1.9bn in July, above the $1.5bn figure expected. Exports (-3.3%) fell by more than imports (-2.5%), narrowing the surplus from $2.3bn in June (revised up from $1.9bn).  

July's $1.9bn trade surplus followed a $2.3bn surplus in June, marking back-to-back surpluses for the first time since the start of the year. The Gulf conflict has increased volatility in global trade, which was already recovering from tariff-related uncertainty. The 3-month average for the trade balance was a wafer-thin surplus of $0.6bn, down from $4.2bn a year ago. That compression reflects growth imports (14.1%yr) significantly outpacing exports (2.6%yr) 

Exports declined by 3.3% in July to $46.3bn (2.6%yr). The main source of weakness was in non-monetary gold, those exports down 26.1% on the month. Non-rural goods were broadly flat (-0.2%) as LNG exports lifted strongly (9.6%) only to be offset by declines in iron ore (-1.6%) and coal exports (-4.3%). Defying the trend, rural goods increased by 5.8% for the month on the back of a strong increase in cereals (19%). 

Imports were down for the third month running posting a 2.5% fall, coming in at $44.3bn (14.1%yr). Declines in global oil prices amid optimism around a durable reopening of the Strait of Hormuz saw fuel imports fall by 12.3%m/m, extending their decline over the past 3 months to 29%. That saw intermediate goods imports fall 7.8% in July. 

That outweighed increases in capital (6.7%) and consumption goods (3.5%). Data-centre related imports looked to pick up as ADP equipment rose 50% in the month, driving capital goods. Meanwhile, consumption goods were boosted by vehicle imports (8.2%), a key theme in yesterday's June quarter economic growth figures (see here).  

In review | Australian Q2 GDP: Growth remains resilient

The Australian economy expanded by 0.4% in the June quarter, modestly outpointing consensus and growth in the March quarter (0.3%). Over the first half of the year, the economy was resilient to global and domestic headwinds, though momentum was slower than in the back half of last year. Year-ended growth eased from 2.5% to 2.1% but was a little stronger than forecast by the RBA (1.9%). 

The conflict in the Gulf was unable to be resolved by the MOU signed by the US and Iran, with energy supply through the Strait of Hormuz continuing to be disrupted. However, global growth held up much better than feared, rising by 0.5% in the June quarter across the OECD. AI-related investment was the key driver of growth, particularly in Asia.    

 

In Australia, growth slowed to 0.7% over the first half of the year, down from 1.4% across the back half in 2025. That largely reflects the shift from the public sector to the private sector as the major driver of growth. Governments are looking to tap the brakes on spending growth in a higher interest rate environment, while projects in the public investment pipeline have reached or are nearing completion. 

The data centre build out has had varying impacts on growth. Business investment has accelerated, though that has been partly offset by the ramp in imports required in the fit-out stage, with net exports contributing to the slowdown. But these facilities will support growth as they come on line. 

Another key theme has been the resilience of households, though there are plausible reasons for this. The halving of the federal excise tax lessened the impact of the fuel price shock on households, while the RBA's tightening cycle is yet to cycle through household cash flow. A cooling housing market also poses risks to consumption and dwelling investment. Tax changes to the treatment of capital gains and negative gearing in the May Federal Budget is another factor currently impacting the housing market.  

From the perspective of the RBA, the June quarter National Accounts will likely reaffirm some of its key judgements. Growth was a little stronger than expected at 2.1%Y/Y, around the pace it sees as the speed limit for the economy given the ongoing weakness in productivity growth (-0.2%Y/Y). Inflationary pressures remaining elevated - the GDP deflator was 3.1%Y/Y - is likely to be taken as a sign that capacity constraints are continuing, if not broadly then in certain areas of demand, such as business investment and housing construction. Domestic demand at 3.1%Y/Y remains well in front of headline growth. Those factors point towards the RBA following the market path in hiking the cash rate further.    

— — —

National Accounts — Q2 | Expenditure: GDP (E) 0.3%q/q, 2.0%Y/Y 

Growth across the expenditure components was 0.3% in the quarter, matching headline growth. Annual growth eased from 2.3% to 2%.

Household consumption (0.4%q/q, 1.8%Y/Y) — Remained resilient lifting by 0.4% in the quarter and 0.8% across the first half of the year. Robust labour market condtions and the federal excise tax cut on fuel supported consumption. However, cost-of-living pressures, higher interest rates, and global tensions have been headwinds. Annual growth is now 1.8%, its weakest since early 2025.

The Gulf conflict and fuel surcharges weighed heavily on travel, most notably to northern hemisphere destinations where departure numbers fell for the first time since the pandemic. Despite this, discretionary-related spending was still the major driver of consumption growth, rising 1.4% in the quarter (1.7%Y/Y). That came on the back of a 10.3% surge in vehicle purchases during the quarter, with EV sales reaching record highs amid the fuel price shock. Essentials consumption declined in the quarter (-0.3%), with households appearing to limit energy usage (-6%) given the crisis in the Gulf and after government rebates had ended.

Robust labour market conditions - notwithstanding a slight uptick in the unemployment rate to 4.4% in the quarter - continued to support household incomes, underpinning the resilience in consumption. Gross income lifted 1.6% and 6.2% year-on-year. That had to absorb the impact of RBA rate hikes - interest payments rose 10.4% (11%Y/Y) - and higher income tax, up 0.4% (8.1%Y/Y). As a result, disposable incomes rose by a more modest 1.1% in the quarter (5.5%Y/Y). 

After adjusting for inflation (the consumption deflator rose 0.6%q/q and 3.1%Y/Y) real incomes increased 0.6%q/q and 2.4% through the year. That outpaces the growth in consumption (1.8%Y/Y) and may reflect the level of caution amongst households implied by very weak sentiment readings. What is clear is that households have been reluctant to reduce saving. The household saving ratio was little changed at 6.5%, in line with its average of the past year.    

 

Dwelling investment (1.6%q/q, 5.8%Y/Y) — The upswing in residential construction activity continued with a 1.6% rise in the latest quarter, lifting annual growth from 4.2% to 5.8%. However, headwinds to the sector are intensifying with higher interest rates, declining housing prices, cost pressures and changes to long-standing tax concessions all in the mix. Softening housing market conditions are weighing on ownership transfer costs (fees associated with housing transations), which fell 5.9% across the first half of 2026.    

New home building lifted by 1.7% in the June quarter, working up 6.3% through the year - its fastest pace in two years. However, momentum here was clearly slower in the opening half of the year (1.8%) than in the back half of 2025 (4.4%). By contrast, alterations (1.4%q/q) accelerated through the first half of the year (5.2%).   

Business investment (-0.5%q/q, 10.5%Y/Y) — Eased back in the June quarter (-0.5%), unable to advance after surging very strongly in the March quarter (6.2%). Still, annual growth in business investment was unchanged at 10.5% and has been the major driver of economic growth over the past year as the data centre build out has ramped up. 

Although non-dwelling construction (3.5%) saw its fastest quarterly rise in 2½ years from ongoing work on data centres and renewable energy and mining projects, that was offset by weakness elsewhere. Machinery and equipment investment moderated from the rise in the previous quarter (14.6%) to be down 5.6%. Meanwhile, cultivated biological resources fell 3.4%. 

Public demand (0.2%q/q, 1.9%Y/Y) — The impulse to growth from public demand is soft, having cooled materially over the past couple of years. In the June quarter, public demand rose 0.2%. That was only a partial rebound after declining in Q1 (-0.5%), resulting in a 0.3% contraction over the first half of 2026. In the latest quarter, government spending rose 0.6%, led by non-defence portfolios. Public investment fell 1.3% as major projects continued to wind down.

Inventories (-0.1ppt in Q2, -0.2ppt yr) — Inventory levels increased very marginally in the June quarter ($0.1bn) following a larger rise in the March quarter ($0.7bn). The change between the two (-$0.6bn) saw inventories deduct 0.1ppt from growth in the June quarter. Non-farm inventories fell (-$0.6bn) as exports in the mining sector recommenced following port closures due to cyclone activity in Q1. However, wholesale and retail inventories rose due to strong EV demand.   

Net exports (0.1ppt in Q2, -0.8ppt yr) — Net exports added to growth for the first time since the December quarter of 2023, albeit contributing just 0.1ppt to GDP. This result reflected a rebound in exports (0.8%) after falling in Q1 (-1.1%) and imports slowing (0.5%). 

Exports were supported by resources (2.5%) after cyclones hampered port operations earlier in the year. Coal exports (11.8%) were the major driver. However, reduced inbound travel amid the Gulf conflict weighed on services (-1.5%). Imports held up to post their 8th consecutive rise. Despite the disruption to global energy supply from the closure of the Strait of Hormuz, fuel imports still lifted by almost 6%, but the major driver was surging vehicle imports, notably EVs (37.6%). Services imports weakened sharply (-4.9%) as Australians shelved overseas travel plans due to the uncertainty and disruption in the Gulf.       

— — —

National Accounts — Q2 | Incomes: GDP (I) 0.5%q/q, 2.1%Y/Y 

The GDP income estimate increased by 0.5% in the June quarter and 2.1% year-on-year, down from 2.5% previously. Wage incomes continued to be supported by robust labour market conditions, despite some loosening in the unemployment rate to 4.4% from 4.2% in the March quarter. The compensation of employees rose 1.5% quarter-on-quarter and 6% year-on-year. The public sector (1.8%q/q) continued to outpace the private sector (1.4%q/q), with the former boosted by scheduled pay rises to health care workers. 

Corporate profits rebounded in the June quarter as commodity prices increased and sales recovered after being disrupted in the March quarter by adverse weather. That drove private non-financial company profits to a 2.5%q/q rise (5.1%Y/Y), more than reversing their 0.9% fall in the previous quarter. Outside the mining sector, professional services and construction were key contributors. 

Financial sector profits maintained solid growth rising by a further 2.4% in the latest quarter, increasing by 10.2% through the year, a 3-year high. Expansion in loan books and net interest margins were the key factors. Gross mixed income - small business profits - remained under pressure falling for the second consecutive quarter (-1.5%) to be off 2.9% over the first half of the year. These firms may be suffering from a lack of pricing power, while input costs pressures (including from fuel prices) could also be relevant      

— — —

National Accounts — Q2 | Production: GDP (P) 0.5%q/q, 2.3%Y/Y

The GDP production estimate increased by 0.5% in the quarter, while annual growth slowed from 2.8% to 2.3%. Output expanded in 14 of the 19 industries tracked by the ABS.

Business services made the strongest contribution growth in the quarter, rising by 1% and 4.1% over the year. That reflected demand for a range of professional services (2.3%) including engineering, management and AI-related services. The financial sector also contributed (1.3%) amid strong loan demand. 

Goods-related sectors rose across production (0.2%) and distribution (0.6%). Production was boosted by the mining sector (1.3%) as output recovered from the weather-related disruptions in the previous quarter. Construction also advanced (0.4%). In the distribution area, wholesalers (0.5%) and retailers (0.2%) benefitted from the strength in vehicle sales. The transport industry was still able to expand (0.9%) despite the fuel price shock.

Australian GDP growth 0.4% in Q2

Resilient household spending underpinned stronger-than-expected growth in the Australian economy in the June quarter, rising by 0.4%. This slightly outpointed consensus and growth in the March quarter, both 0.3%. Annual growth, despite easing from 2.5% to 2.1%, came in above the RBA's forecast (1.9%). Ongoing weakness in productivity (-0.2%Y/Y) likely reinforces to the RBA its view that the economy is operating close to its speed limit and will need to slow for inflation to come back to the 2-3% band. Markets are pricing in an additional RBA rate hike by year-end, following the three increases the central bank has already delivered in 2026.  

Household consumption (0.4%) was the main driver of growth in the June quarter. The federal excise tax cut significantly lowered petrol prices and that looks to have been a key factor in easing pressures from higher interest rates and the broader cost of living. Notably, discretionary consumption (1.4%) rose at its fastest pace in a year, despite the Middle East conflict hampering overseas travel, as the fuel price shock saw EV sales surge. Headwinds in the housing market are intensifying, but the upturn in dwelling investment (1.6%) continues, responding to last year's RBA rate cuts.

Business investment was unable to keep pace with its acceleration in the previous quarter (6.2%), posting a 0.5% decline. However, the data centre build out has much further to run, and as the chart above shows, business investment has made the largest contribution to growth over the past year. Alongside the slowdown in the latest quarter, imports pulled back. That allowed net exports to add to quarterly growth (0.1ppt), with exports in the resources sector rebounding from weather-related disruptions earlier in the year.    

More to come. 

Australian dwelling approvals slide 3.6% in July

Australian dwelling approvals declined by 3.6% in July against more pessimistic forecasts for a 5% fall. That was driven by the fastest fall in detached house approvals (-4.5%) since October 2024, a sign that the RBA's tightening cycle may be starting to hit the interest-sensitive sector.      

Dwelling approvals fell 3.6% to 17.7k in July, pulling back from a 6.9% lift in June. The July result was exactly in line with the 3-month average for approvals, which sits just below highs going back to late 2021. 

The surprise result in the report was detached house approvals falling by 4.5% in July (10.4k). That was their largest fall since October 2024 and their first decline at all in 8 months. Housing prices are continuing to see modest falls amid higher interest rates, down a little more than 3% over the last 3 months (including a 0.9% decline in August) according to today's release from Cotality. Whether the fall in dwelling approvals in July reflects these dynamics remains to be seen, but the headwinds are gaining strength.    

Higher density or unit approvals were down 2.4% in July - a modest movement for this volatile segment - coming in at 7.3k. The more detailed data indicated the high rise segment was the main driver of the decline. 

Alteration work approved fell in value by 3.9% in July, easing back below $1.3bn to be up by just 1.1% over the year. To the extent that the tax changes in the May Budget reduce investor demand for existing housing, this component may continue to come under pressure, though cost increases and trade availability are also considerations.  

Meanwhile, non-residential approvals hit back with a 14.4% rise in July ($9.9bn) after falling 17.5% in June. Over the year, these approvals have lifted by more than 50%, boosted by the data centre build out. 

Australia Current Account -$27.2bn in Q2; net exports 0.1ppt

The fuel price shock stemming from the Middle East conflict has seen Australia's current account deficit deteriorate to decade-long wides at more than 3.5% of GDP in the June quarter. The deficit widened to $27.2bn, slightly better than the $30bn deficit forecast, from $25.4bn in the March quarter (revised from -$27.1bn). The deterioration came as soaring fuel prices due to the closure of the Strait of Hormuz saw import spending accelerate at its fastest pace in over two years (4%). That outpaced a robust rise in export revenue (2.8%), driven by the resources sector. However, once adjusting for price movements, export volumes (0.8%) got the points over imports (0.5%), with net exports to add a modest 0.1ppt to quarterly GDP growth.  

The current account deficit widened by $1.8bn over the June quarter to $27.2bn (AUD), around 3.7% of GDP (based on nominal GDP in the March quarter). By that measure, that is the largest deficit in 10 years. This was driven by the underlying trade balance, which deteriorated from a deficit of $2.9bn to $5.1bn - its largest since Q3 2016. The income deficit improved very slightly to $21.9bn. The currency has defied the nation's deteriorating current account to rise in trade weighted terms by nearly 10% since Q1 2023.  

Total import spending rose at its fastest pace (4%) since the March quarter of 2024 to $179.6bn (10.9%Y/Y). That incorporated a 3.5% increase in prices, with just a 0.5% lift coming through from underlying volumes. The price uplift relates largely to the impact of higher fuel prices, while EV demand explains the volume increase, with vehicle imports surging by almost 38% to record highs. Data centre-related imports took a step back in Q2 from a very strong Q1.  

Export revenue rebounded from a 0.8% fall in the March quarter to rise by 2.8% to $174.5bn (6.3%Y/Y). As with imports, prices were the main driver, up 1.9% in the quarter, with underlying volumes increasing by 0.8%. Higher commodity prices and the resumption of exports following port closures due to adverse weather were the key factors. Resources export volumes increased by 2.5% in the quarter, reversing a 2.4% fall in the March quarter.  

Overall, with export volumes up 0.8% in the quarter and outpacing the 0.5% rise in imports, net exports are estimated by the ABS to add a modest 0.1ppt to GDP growth in the June quarter. That follows a 0.8ppt deduction to growth in the March quarter after imports surged, driven by data centre-related equipment purchases. Across the past year, net exports have weighed on growth materially by around 1ppt. Imports have risen by 6.7% while exports are only up 2.9%, the former benefiting from the data centre build out.   

Australian Business Indicators Q2: Inventories -0.2%

Australia's Business Indicators series for the June quarter was softer than expected across the key details for inventories (-0.2%) and company profits (1.8%) going into Wednesday's economic growth figures. However, it also highlighted the resilience of domestic demand, supported by the data centre build out.   

Today's report showed that demand conditions in the domestic economy remained resilient to global and domestic headwinds. But company profits were squeezed by renewed inflationary pressures, including from the fuel price shock. Sales volumes rose 0.8% in the quarter (2.8%Y/Y), though that was boosted by a rebound in the mining sector (3.3%) after production and exports were impacted by cyclones in the March quarter. However, excluding mining, sales still lifted 0.5% in the quarter to be up 1.5% across the first half of the year. 

The data centre build out looks to have remained a prime mover for the economy in Q2, reflected in gains across professional services (4.3%), construction (3.1%) and telecommunications (3%). The consumer-related sector was mixed: hospitality (0.5%) and retail (0.4%) rose but recreation fell (-0.3%). Higher fuel prices likely weighed on manufacturing (-0.1%), though the transport sector still advanced (1.2%). Wholesalers also rose (0.6%) suggesting firms may have aimed to get ahead of supply disruptions, though this is more likely to reflect strong EV sales.     

Company profits were up 1.8% in the June quarter (7.4%Y/Y), slightly below expectations (2%). However, that reduces to a 0.9% rise after adjustment for inventory valuations, which more closely aligns with the National Accounts methodology.  

The mining sector was the key driver (6.8%) as production came back on line and as commodity prices rose alongside the energy shock. Non-mining sector profits fell by 1%q/q (7.7%Y/Y), the first decline in a year, pointing to margin pressures and the fuel price shock. It also suggests pricing power is not as strong as it was back in 2022 as inflation accelerated.   

Companies are also dealing with solidly rising labour costs. The wages bill lifted a further 1.4% in the June quarter, rising by 5.7% through the year. The punchiest rise came in telecommunications (4.3%), again likely data centre related.  

Today's report estimated inventories contracted by 0.2% in the June quarter, a downside surprise on expectations for a 0.5% lift (prior: +0.7%). Based on this, private non-farm inventories are likely to deduct 0.3ppt from quarterly GDP growth, with details on public sector inventories due tomorrow. Mining inventories, which accumulated due to adverse weather in Q1, started to be run down in Q2 (-4.8%) as production and shipping came back on line. Inventories were also weighed by manufacturing (-0.9%) and utilities (-13.1%). This more than offset builds in wholesale trade (1.7% - likely EV related), retail trade (1%) and hospitality (3.4%).