Macro (Re)View (28/8) | Hawkish reappraisals

A flatter US Treasury curve and stronger USD defined the reaction as Fed Chair Warsh made clearer his intentions to get inflation back on track at Jackson Hole. Market-implied odds for a Fed rate hike in September doubled to around a 60% chance, while a hike is priced by year-end. Equities declined modestly in response but still advanced for the week, supported by earnings results from NVIDIA. Australia saw its own hawkish repricing of the rates outlook, with the RBA's tightening cycle looking likely to have to extend further.    

Fed Chair Warsh's keynote address at the Jackson Hole Symposium gave markets the clearest signs yet of his inflation fighting credentials. Since taking on the post in May, Warsh has largely kept his own counsel on how policy will respond to elevated inflation, leaving a sense of frustration in markets. In the speech, Warsh said he'd be 'hard pressed' to conclude financial conditions were restrictive, while also casting doubt that underlying inflation was tracking in the right direction. If those trends failed to improve, Warsh said the Fed would 'have work to do'.  

The account of the ECB's July meeting pointed towards a Governing Council that is on track to hike rates in September, validating market pricing. Although there have been few signs of second-round effects on inflation due to the energy price shock, upside risks to the inflation outlook remain and growth has been more resilient than expected. The ECB discussed hiking in July but ultimately held a steady hand amid the uncertainty around the outlook and after inflation data for June undershot forecasts.

In Australia, a fourth RBA rate hike for the year is now effectively fully priced, rising from about a 50% chance on the back of a stronger-than-expected inflation report. Another rate hike looked an underpriced risk given the hawkish tone to the RBA's August meeting minutes, which conveyed the Board's lack of conviction in forecasts for inflation to slow towards target. Meanwhile, household spending was up a robust 1.1% in July (see here), while next week's Q2 GDP growth figures are expected to confirm household demand remains surprisingly resilient (see here).    

In July, headline CPI rose 1%m/m (0.8% exp) as the reduction in the federal excise tax cut saw fuel prices rise (7.5%), while domestic travel costs also lifted (6.2%) (see here). Annual CPI eased from 3.8% to 3.5% but was expected to come in at 3.3%. The services basket (0.7%m/m, 3.7%yr) remains a thorn in the RBA's side, reflecting pressures in housing-related costs and household services. That sees inflation on an underlying or trimmed mean basis running at 0.5%m/m, 3.6%yr, firmly above the RBA's 2-3% target band.   

Preview: Australian Q2 GDP

Australia's June quarter economic growth figures are due in next week's National Accounts release (2/9). Growth slowed in the March quarter (0.3%) and a similar pace is likely in the June quarter, though more data early next week will shore up estimates. Annual growth is solid at 2.5%, though the underlying momentum in the economy has been materially stronger than this implies, despite the RBA's tightening cycle judged to have made the cash rate 'somewhat restrictive' and the fuel price shock. Domestic demand is running at a 3.5% annual pace - its strongest since late 2022 - as household consumption has remained resilient, while the data centre build out has seen business investment accelerate. Amid these dynamics, data this week reported that inflation surprised to the upside in July, with a further RBA hike now expected by year-end.   

March quarter recap: Slowdown belies underlying momentum 

Headline GDP growth slowed to 0.3% in the March quarter from 0.9% in the December quarter. However, that was driven by net exports (-0.8ppt) and inventories (0ppt) alongside a softer impulse from the public sector (0.1%), belying underlying strength in domestic demand (1%). Annual growth in GDP was steady at 2.5%, while domestic demand advanced 3.5%Y/Y. 

The consumer took much of the focus after the fuel price shock amplified cost-of-living pressures, but while discretionary spending was weak (0.1%), household consumption was resilient (0.4%). Business investment, the key driver of growth, is surging (5.7%) to facilitate the data centre build out. Much of the equipment used in the data centre fit out is imported, leading to net exports delivering its largest hit to growth in two years, though weaker exports were also a factor as cyclones hampered port operations in the resources sector.  

June quarter preview: Defying the headwinds 

Despite trade and geopolitical headwinds, global growth has held up due largely to the AI-related investment boom. In the Gulf, an MOU signed by the US and Iran enacted a ceasefire and helped lower oil prices; however, the agreement failed to provide a durable solution to either ending the conflict or reopening the Strait of Hormuz. Growth across the OECD group was 0.5% in the quarter, with the US, euro area and UK all rising by 0.4%. In China, growth slowed to 0.9%.  

Domestically, surging fuel prices on top of existing inflationary pressures prompted the RBA to continue its tightening cycle with a 25bps hike in May following earlier increases in February and March. This has been a factor behind very weak consumer sentiment, but household spending has defied this backdrop to remain resilient. Rate hikes have, however, had a near immediate impact in the housing market. Dwelling prices nationally have fallen almost 2% in the three months to July. Prices in Sydney and Melbourne are down 3-4%. 

Lags in monetary policy transmission mean that the solid momentum residential construction currently has is likely supported by the RBA's rate cuts in 2025. However, with interest rates now on the rise, dwelling prices declining and cost pressures increasing, housing construction faces a challenging outlook. Business investment cooled in the quarter but remains a key growth driver alongside the data centre build out.  

Key dynamics 

Household consumption — Showed ongoing resilience to higher interest rates and weak sentiment, helped by the fuel excise tax cut. Discretionary demand was robust, including in recreation, travel and hospitality.  

Dwelling investment — Partial data indicated residential construction activity advanced further in the latest quarter, supported by new home building and alterations. Headwinds to the cycle from declining housing prices, higher interest rates and cost increases are intensifying.  

Business investment — Took a step back in the June quarter as equipment purchases were unable to keep pace after surging in the March quarter. However, the outlook remains strong, with investment plans upgraded as the data centre build out continues. 

Public demand — Has softened over the past year, though that partly reflects the fading impact of spending on energy rebates. More details to come early next week. 

Inventories — Made a neutral contribution to growth in the March quarter. The resumption of resources exports after weather-related disruptions earlier in the year may drive a negative contribution in the June quarter, though this will be confirmed in data early next week. 

Net exports — Coming off its largest reduction to growth in two years, with exports impacted by adverse weather conditions and surging imports to facilitate the data centre build out. Balance of payments data to confirm the extent of the rebound. 

Australian household spending rises 1.1% in July

Australian household spending surprised modest expectations (0.3%) rising by 1.1% in July. This was its third increase in succession, and its 6th rise from the first 7 months of the year. The July result came on the back of broad-based strength across all categories. Robust spending follows yesterday's stronger-than-expected increase in inflation in July, the catalyst for one additional RBA rate hike to now be largely priced in by year-end.  

Household spending posted another robust outcome as the 1.1% rise in July uplifted annual growth from 6.1% to 7%. This followed gains of 1.2% in May and 1% in June. Spending through this period has been supported by the federal government's fuel excise tax cut, while global oil prices also declined as tensions in the Gulf eased enough for energy supply to resume through the Strait of Hormuz. Due to lags in monetary policy transmission, 2025's rate cuts would be supporting spending to some extent - even though the RBA has since unwound that policy easing.  

The underlying detail reported gains across both goods (0.7%m/m) and services spending (1.5%m/m). The latter was driven by recreation and culture (1.5%) as gambling spending picked up and due to strong demand for tickets to sporting events and cinemas. There appears to have been an associated boost for dining out as spending at hotels, cafes and restaurants lifted (1.1%). Meanwhile, health-related spending (1.2%) was supported by a range of healthcare services and pharmaceuticals. Goods spending rose on the back of gains in clothing and footwear (1.6%) and food (1%).     

Australian Capex -3.6% in Q2; 2026/27 investment plans $201bn

Australia's capex upswing took a step back in the June quarter, though forward-looking investment plans indicate the data centre build out will keep the cycle rolling. Capex was down 3.6% for the quarter, slowing more than expected (0%) from the 6.9% acceleration in the March quarter. A pullback in equipment-related investment (-11.3%) will weigh on quarterly GDP, but that should prove a temporary headwind to business investment as a growth driver. Firms' 3rd estimate of capex plans in 2026/27 rose above $200bn following an uplift of 15.5% to the previous estimate. 

The 3.6% decline in private sector capex was a downside surprise and its largest fall since the pandemic; however, the result is more a reflection of its recent strength rather than outright weakness. Capex was coming off its largest rise in 14 years after surging 6.9% in the March quarter (revised up from 6.5%) driven by the tech-related investment boom in data centres. Even after this decline, capex still rose by 10.7% over the year to the June quarter.  

Equipment investment pulled back by 8.9% in the latest quarter following an increase of more than 18% in the March quarter. The data centre build out is equipment intensive, particularly relating to the fit out of these facilities, and this has underpinned the upswing in capex over the past year. Equipment investment is up 18.7% over the year. Buildings and structures lifted 2.1% in the June quarter to be up 3.8% year-on-year.    

Non-mining sector capex unwound by 5.3% in the quarter, outweighing a 1.6% rise from the mining sector. While equipment investment in the non-mining sector declined by 11.3%, buildings and structures rose 3.3%. In the mining sector, buildings and structures were flat (-0.1%) but equipment increased 5.4%. 

The data centre build out is largely playing out in the information media and telecommunications industry. Capex in the industry has nearly trebled over the past couple of years, reflecting both the construction of data centres as well as the fit out. In the latest quarter, investment in equipment fell 53% (after rising 200% in Q1), while buildings and structures rose 17.7%. 

Firms' investment plans for the 2026/27 financial year rose to $200.7bn, with the 3rd estimate increasing by 15.5% on estimate 2 put forward three months ago ($173.7bn). For context, that is a little stronger than the average uplift from estimate 2 to 3 seen over the past 10 years of 13.5%. On a year-to-year basis, investment plans increased 14.8%. 

Non-mining sector capex is on track to increase to $144.3bn, an uplift of 17.7% on the prior estimate. Within that, there were large increases to forecast spending on equipment (+16.9% to $68.9bn) and buildings and structures (+18.4% to $75.4bn). Capex in the mining sector is tipped to rise to $56.4bn, an upward revision 10.3%. 

Australian construction activity -2.1% in Q2

Australian construction activity contracted by 2.1% in the June quarter, a weaker-than-expected result (0.5%). However, the weakness related to volatility in the engineering segment (-6%), which unwound after a March quarter spike. The data centre build out continued to drive growth in non-residential construction, while the residential sector remained on the rise.   

Construction work done fell by 2.1% in the June quarter, its weakest outturn since the September quarter of 2020, downshifting annual growth to 2.7% from 7.3%. However, as alluded to above, the result was heavily impacted by a 6% decline in engineering work (-5.1%Y/Y), reversing after a 7.4% surge in the March quarter that related to the installation of equipment for a large-scale energy project. 

Building work rose 1.3% overall in the latest quarter - its 9th consecutive rise - to be up 10% through the year. That includes both the private and public sectors, which saw a significant divergence this quarter. Private sector building work lifted by 2% whereas public sector building work was down 3.9%.      

This latest gain in private sector building lifted annual growth to almost 12%. This has been supported by non-residential building (2.3%q/q, 18.4%Y/Y) due largely to the data centre build out and investment in renewable energy. Meanwhile, residential building (1.8%q/q, 9.1%Y/Y) has also accelerated helped by the RBA's rate cuts last year. Private engineering activity was down 8.7%q/q after lifting by 16.6% in the prior quarter.    

In the public sector, total activity declined by 2.5% on falls across engineering (-2.1%) and building work (-3.9%). Over the past year, public work has contracted by 3.4%, reflecting the earlier completion of major government projects.

There were clear signs in today's report of renewed inflationary pressures in the sector. The construction implicit price deflator rose 1.8% in the June quarter, its sharpest rise since the December quarter of 2022, lifting to a 4% year-on-year pace. 

Australian CPI 3.5% in July

Australia's latest inflation report surprised to the upside of expectations in July, with the partial unwind of the federal fuel excise tax cut playing a key role. Headline inflation rose 1% in July, above the 0.8% lift forecast after cooling over May (-0.7%) and June (-0.1%). Base effects, however, saw the annual rate slow from 3.8% to 3.5%, a low since last November. Underlying or trimmed mean inflation rising 0.5% in July held the annual pace unchanged at 3.6%, remaining elevated to the RBA's target band. Although markets still expect the RBA to hold in September, the odds of a rate hike have been repriced to about a 35% chance. 

Headline inflation picked up in July, lifting slightly more than expected by 1% month-on-month. The federal excise tax cut was halved from its earlier reduction in July, with fuel prices rising by 7.5% in the month. That followed a 27% fall in fuel prices over the 3 months to June. Another key factor was a 6.2% rise in domestic holiday travel costs due to increased demand during the mid-year school holidays. Increases across a range of household services (0.5%) and housing-related costs (0.4%) were the other main contributors to the rebound in inflation.    

Over the past year, housing (5%) has been the major driver of inflationary pressures. Electricity prices (6.1%) have risen after state government rebates unwound, while dwelling construction costs (5.7%) have lifted as builders have passed through higher materials and labour costs. Meanwhile, rents have increased solidly (3.6%) as have council rates and charges (6.2%).

Underlying inflation in July lifted by 0.5% in the month, its fastest rise in 12 months. That kept the annual pace at an unchanged 3.6% to be at highs since 2024. The RBA's view is that with underlying inflation sitting above the target band, there are capacity pressures in the economy at play, partly emanating from the long period of weak productivity growth. These themes were reiterated in the August meeting minutes published yesterday, which indicated the Board was open to further cash rate tightening. 

Macro (Re)View (21/8) | Markets skeptical on Treasury plans

US equities snapped a run of three straight weekly gains, declining by their most since mid July. Fiscal sustainability concerns increased after the US Treasury announced plans to significantly increase its buyback operations of longer-dated bonds. The benchmark US 10 and 30-year yields, both at elevated levels, ended the week higher. Signs of these concerns spilling into the FX market were evident as the US dollar softened this week (-0.8%). 

Australian labour market data this week looks to support the RBA remaining on hold, though next week's inflation report will likely be given more weight by the central bank. Employment fell by 15.8k in July, lifting the unemployment rate from 4.4% to 4.5%. These were downside surprises on expectations for modest jobs growth (12k) and a steady unemployment rate (4.4%). However, as noted in my review (see here), the higher unemployment rate was due to rounding effects, while employment growth was still tracking at a solid pace with gains averaging around 34k per month over the past 3 months. 

The RBA has stressed not overly interpreting volatile labour market data and only last week reaffirmed its view that the overall balance of conditions remained tight - despite revising up its outlook for the unemployment rate. Meanwhile, wages growth held steady at a 3.2% annual pace in the June quarter, broadly in line with RBA forecasts (see here). Private sector wages growth eased to a 4-year low (3.1%), continuing to be outpaced by the public sector (3.4%). 

Focus around the Treasury's buyback plans overshadowed events in the US. The minutes of the Fed's July meeting expressed caution, reflecting the split 9-3 decision to hold rates steady. Inflation risks are seen as 'skewed to the upside' and that 'many participants' expected policy tightening would be required unless inflation declined. Also gaining attention was the fact that Chair Warsh was exploring reducing the number of policy meetings from 8 to 6 per year.   

In the UK, markets continue to price a BoE rate hike by year-end, though the data makes a case against it. The single month unemployment rate was 5.4% in June, a high since late 2020, while the more stable 3-month measure held at 4.9% against expectations to decline to 4.8%. Meanwhile, wages growth for the 3 months through June eased to a 4.1% annualised pace, softening from a prior 4.4%. Higher energy prices saw headline CPI lift from 2.6% to 2.9%yr in June, in line with forecasts. Core CPI was unchanged at 2.6%yr but services inflation - the key part of the basket for the BoE - slowed from 3.6% to 3.4%yr.  

Australian employment -15.8k in July; unemployment rate 4.5%

Australia's unemployment rate printed at 4.5% in today's Labour Force Survey for July, rounding up from 4.4% in June. It was expected to hold at 4.4%, but employment surprised to the downside falling by 15.8k against the 12k rise forecast by markets. The unemployment rate has risen a little faster than the RBA was expecting and that prompted an upward revision to its forecasts in the recent Statement on Monetary Policy. Despite this, the RBA retains a hawkish tilt vowing that rates may still rise. The consensus view among forecasters is that the tightening cycle has reached its conclusion, but market pricing implies a roughly 50/50 chance of the RBA hiking rates for a 4th time this year. 

Employment declined by almost 16k in July as weakness in the part time segment (-32.2k) overwhelmed a rise from full time (16.3k). However, that came after employment rose strongly in May (38.2k) and June (80.2k). That leaves the 3-month average for employment at a respectable 34.2k, its highest since February boosted by those earlier gains.    

The unemployment rate registered at 4.5% rising from 4.4% in June. But the move was marginal upon closer inspection. In June the unemployment rate was 4.43% and in July it came in at 4.46%, so in the prior month it rounded down to 4.4% and then in today's report it rounded up to 4.5%. 

Despite employment falling by 15.8k, the total number of unemployed workers only increased by 4.2k because the labour force declined by 11.2k. That was reflected in the participation rate falling from 67% to 66.9%. 

The broader underemployment rate printed at 6.4%, though total underutilisation rounded down to 10.8% from 10.9% in June - neither movement significant in an overall assessment of conditions. The labour market has loosened slightly since the start of the year but the RBA still judges the overall balance as tight. Wages growth in yesterday's update reported no change in the annual pace at 3.2%, which is broadly in line with the RBA's forecasts (see here).  

In another volatile result, hours worked declined by 0.6% in July to be near-flat over the year (0.2%). Hours worked rose by around 0.4% over the June quarter, so this was a soft start to the September quarter; however, these readings have swung sharply from month to month in recent times. 

Preview: Labour Force Survey — July

Australia's monthly labour force report for July is out this morning (1130 AEST). Although employment is expected to moderate following a solid rise over the previous quarter, the consensus forecast is for the unemployment rate to hold at 4.4%. The RBA has kept rates on hold since May but maintains the labour market is still relatively tight - despite raising its outlook for the unemployment rate following recent data. Market-implied pricing for one further rate hike this year is around 50%.  

July preview: Does unemployment rise? 

Employment is expected to moderate to a 13.5k rise in July after accelerating by 76.3k last time out in June. Estimates for the print cover a wide dispersion ranging from -15k on the low side to +25k top side. Expectations for the unemployment rate are set for an unchanged 4.4% (range: 4.3-4.5%). However, the unemployment rate could face some upside pressure if employment was to cool as expected and labour force participation increases.    

June recap: Employment accelerates holding unemployment at 4.4% 

Employment surged to a 76.3k rise in June, a strong upside outcome on consensus (15k) and the largest increase since April last year. That came after a 44k lift in May. The June result was partly driven by a larger-than-usual number of people who were attached to a new job in May but were yet to start work. The part-time segment was the key contributor with a 47k rise but full time employment also increased by 29.3k. 

On the strength of employment growth in June, the unemployment rate held steady at 4.4% even as the participation rate increased from 66.7% t0 67%, an 11-month high. However, with the underemployment rate rising from 6.3% to 6.5%, labour force underutilisation lifted from 10.7% to 10.9% to be at its highest since late 2021. 

Australian Q2 Wage Price Index 0.8%; 3.2%yr

Australian wages growth maintained a steady pace in the June quarter rising by 0.8% and 3.2% in annual terms, in line with expectations and around RBA forecasts. Scheduled increases under enterprise agreements drove wages growth in the public sector (0.9%q/q, 3.4%Y/Y), again outpacing the private sector (0.7%q/q, 3.1%Y/Y). Although the unemployment rate has risen a little since the start of the year, wages growth has been unaffected. If anything, wages growth is more likely to rise following the Fair Work Commission's review decision to lift award rates by 4.75%, a larger-than-expected increase; however, that does not come into effect until the start of the next quarter.

The structure of the labour market sees wages growth receive a bump in the September quarter, the first quarter of the new financial year as increases to the minimum wage and awards and private sector reviews come into effect. In the intervening quarters, wages growth tends to see little change. 

That was the case in today's report as wages growth recorded its 5th consecutive quarterly increase of 0.8%. The annual pace was steady at 3.2%, down slightly from its pace a year ago (3.4%) but well below cycle highs (4.3%) in late 2023. In 3- and 6-month annualised terms, wages growth remained in the 3.2-3.3% range.      

Beneath the surface, wages in almost 80% of jobs is now rising at a pace below 4%, the largest share in 4 years. That has seen the share of jobs with wage rises above 6% falling to its lowest since mid 2022. At the other end of the spectrum, around 4% of jobs are seeing a wage cut. 

In the private sector, wages growth eased slightly to 0.7% in the quarter from 0.8% previously. That saw the annual pace slow from 3.2% to 3.1%, its weakest pace in 4 years. However, it is diffciult to read too much into that given the ABS reported only 10% of jobs saw a wage change in the June quarter. 

As mentioned above, that will rise significantly in the next quarter as the award increase flows through and the data captures end-of-financial year wage reviews. As it stands though, for those jobs that saw a wage change, the average increase was 3.9%. That is unchanged from a year earlier but materially slower than at its peak of almost 6% in 2023. Wage increases have cooled alongside slowing inflation, while it also reflects reduced tightness in the labour market. 

It is slightly a different story in the public sector. That sector is typically less exposed to changes in underlying labour market conditions, while new agreements take time to implement and have often been playing catch-up to inflation in past years. New agreements at the state and commonwealth levels boosted public sector wages growth to 0.9% in the June quarter, sustaining a 3.4% year-on-year pace. Annual wages growth in the public sector has outpaced the private sector since early last year.