Macro (Re)View (31/7) | Searching for answers

Ongoing ambiguity from the Fed this week weighed on the USD despite Chair Warsh maintaining there is little tolerance to above-target inflation. Stronger-than-expected euro area growth in Q2 (0.4%q/q, 1%Y/Y) together with an uptick in inflation in June (2.9%yr) bolstered expectations for further ECB tightening, boosting the EUR. Meanwhile, the JPY strengthened following intervention to support the currency. The BoJ held rates but looks likely to soon hike. The local AUD underperformed following softer inflation data that reduced expectations for RBA tightening.         

Markets were again left searching for details coming away from this week's Federal Reserve meeting in the US. The FOMC held rates at 3.5-3.75%, though there were 3 hawkish dissents to the decision, with Hammack, Kashkari and Logan voting for a 25bps hike. Chair Warsh stuck strongly to his position of refraining from commenting on the stance of policy in the post-meeting press conference. 

Warsh's position is that with reduced commentary, financial markets can give the FOMC a clearer signal on what they view as the appropriate path for policy as economic conditions evolve. A key point of contention in the press conference was the Fed electing to hold despite Warsh talking tough on inflation. Data this week showed the core PCE deflator - the inflation rate the Fed has historically set policy to - was continuing to remain well above target (2%) at 3.3%yr in June. Market pricing leans towards the Fed hiking by year-end.     

The Bank of England continued to maintain a steady hand this week, leaving rates at 3.75% for the fifth successive meeting. There was a slight shift in the vote split as the majority was reduced from 7 to 6 as Catherine Mann defected to join fellow MPC members Pill and Greene in voting for a 25bps hike. Recent inflation outcomes have been cooler than expected and the BoE's updated forecasts in the July Monetary Policy Report lowered the inflation outlook this year and next. 

At the post-meeting press conference, Governor Bailey said the inflation outlook was still subject to the pass-through from the energy price shock; however, second-round effects remained limited with services inflation and wages growth slowing amid a softening labour market. Meanwhile, tighter financial conditions were also giving the BoE breathing space. Benchmark 2 and 10-year Gilt yields have risen 50-60bps since the start of the year.  

Australia's June inflation report was below expectations, with markets scaling back expectations for further RBA tightening. Having already raised rates by 75bps, the RBA is seen as only a 50/50 chance of delivering an additional hike this year. Headline CPI fell for the second month running (-0.1%) as the fuel excise tax cut continued to outweigh other price pressures. This saw the annual pace slow from 4% to 3.8%, against the consensus forecast to lift to 4.2%. 

The quarterly measure for trimmed mean or underlying inflation - the key figure for RBA policy - was 0.8%, holding the year-on-year pace at 3.6% - below the RBA's forecast for 3.8%. However, as Governor Bullock reiterated this week, the RBA will continue to lean against above target inflation, assessed as reflecting a combination of strong demand, supply pressures and weak productivity growth. For more on this week's inflation report, please see my review here. 

Australian dwelling approvals rise 7.2% in June

Australian dwelling approvals rose 7.2% in June, defying expectations for a modest decline (-0.5%) as well as keeping their uptrend intact. House approvals reached their highest level in almost 5 years, despite higher interest rates and the uncertainty of the tax changes from the federal budget slowing housing market conditions.    

Residential housing approvals were up 7.2% in June (18.3k), a much stronger result than the 0.5% fall expected. Over the June quarter, a total of 52.8k approvals went through - an increase of 3.5% on the March quarter. This kept the uptrend in approvals in place, but higher interest rates and the effect of the tax changes on housing investment in the federal budget remain the obvious headwinds to the residential construction outlook.  

House approvals lifted 1.1% in June to 10.9k, a gain of 16% over the past year. This was also the 6th consecutive quarterly rise for house approvals (3.2%), which now stand at their highest levels since late 2021. The rising trend in house approvals has been evident across most states.

Approvals in the higher density or unit segment - volatile from month to month - lifted 17.7% in June to around 7.5k. For the quarter, unit approvals rose 3.7% - a rebound after falling in the March quarter (-8.9%). 

While non-residential approvals fell in value by almost 25% in June, the data centre buildout drove a significant increase over the past 12 months. Over that period, these approvals totaled almost $94bn compared to $76bn in the 12 months to June 2025. 

Australian CPI slows to 3.8% in June

Australian inflation defied expectations to reaccelerate in June, driving hawkish bets on further RBA hikes to recede to a less than 5% chance for the August meeting and only around 50% by year-end. Headline inflation declined for the second month in succession in June (-0.1%), seeing the annual pace slow from 4% to 3.8% - against an expected rise to 4.2%. The key trimmed mean inflation rate for the June quarter - the most influential figure for the RBA in light of its concerns about second-round price rises from the oil shock - also came in soft relative to both market and RBA forecasts, printing at 0.8% quarter-on-quarter and 3.6% year-on-year.   

Headline inflation fell for the second consecutive month, down 0.1% in June after the 0.7% decline in May. Over the quarter, headline inflation was 0.6%, well down from the 1.4% surge in the March quarter. Annual inflation eased from 4% to 3.8% in the monthly series, while in the quarterly data it slowed from 4.1% to 3.9%. As a reminder, the ABS moved from quarterly to monthly inflation releases late last year - but the RBA still prefers the quarterly series.   

In June, fuel (-10.9%) remained the major driver of lower inflation, while price discounting for clothing and furniture also played a role. On the other hand, housing-related costs continued to add to inflation, with rising electricity prices, construction costs and rents all a factor. Meanwhile, overseas travel costs rose due to strong demand, and grocery prices lifted for a 4th straight month.  

Turning back to fuel, prices were down another 10.9% in June following declines in May and April after the federal government halved the excise tax to ease pressure from the oil price shock. Over this period, fuel prices have fallen near on 27%, a direct reduction of around 1.1ppts in the headline inflation rate. Remarkably, fuel prices in June were actually lower than in February - before the conflict in the Gulf disrupted global oil supply. The excise tax cut was subsequently extended by the government through July, but only at half its earlier rate.  

Underlying inflation measured by the trimmed mean was below market and RBA expectations; however, it still remains well above the central bank's 2-3% target band. As reaffirmed by Governor Bullock in yesterday's speech, above-target inflation in her view reflects a combination of strong demand, supply constraints and weak productivity.

Trimmed mean inflation in June was 0.3% month-on-month, while it came in at 0.8% in the quarterly series. The annual pace lifted from 3.8% to 3.9% in the monthly data. In the quarterly series, the annual pace was little changed at 3.6% - below the 3.8% pace projected by the RBA in its May forecasts. 

Key drivers of underlying inflationary pressures have come in housing costs as well as market services. Housing inflation has increased by 6.8% over the past year; electricity prices are up 22.4% as government rebates have ended; construction costs have risen 5.8% amid capacity pressures and as developers have withdrawn incentives, while rents have lifted 3.6%. However, Governor Bullock said the housing market has slowed more sharply than anticipated as it works through higher interest rates and the tax changes set out in the federal budget. 

Market services inflation rose by a solid 1% for the month in June to be up 3.7% over the year. That was its fastest annual pace since December last year. Although the RBA is likely to keep interest rates on hold for now, a combination of elevated underlying and services inflation will see it retain a hawkish narrative.  

Preview: Australian Q2 CPI

Australia's latest inflation report is due today (1130 AEST). In addition to the monthly figures, the report also includes the quarterly inflation rates the RBA tends to place more weight on in setting interest rates. Declining fuel prices have taken some of the pressure off inflation and allowed the RBA to pause its tightening cycle at its June meeting. However, RBA Governor Bullock reaffirmed yesterday that the Board is prepared to hike further. Today's report shapes as the key input ahead of the August meeting where expectations for a rate hike currently sit at only around a 30% chance. 

A recap: Fuel excise tax cut lowers inflation 

Inflation eased in May, largely due to lower fuel prices. Headline CPI fell 0.7% month-on-month - its steepest fall in a single period since the outset of the pandemic - slowing the annual pace from 4.2% to 4%; however, underlying inflationary pressures continued to rise. The trimmed mean CPI was up 0.4% month-on-month, lifting from 3.4% to 3.6%yr - a near two-year high. 

The fall in headline inflation was driven by declining fuel prices in response to the federal government halving the excise tax - a temporary measure for 3 months (effective April 1), providing some relief from the oil price shock stemming from the Middle East conflict. 

As a result, fuel prices declined by 7% in April followed by a further 11.9% fall in May. Holiday travel (-6.9%) was another key factor that weighed on inflation due to seasonal weakness in demand. However, housing-related costs and groceries - near on 40% of the CPI basket - were adding to inflationary pressures in May. 

Meanwhile, quarterly inflation as at the March quarter was running at 1.4% quarter-on-quarter and 4.1% year-on-year in headline terms and 0.8% quarter-on-quarter and 3.5% year-on-year on a trimmed mean basis. 

June preview: Inflation expected to rise again 

After easing in May, headline inflation is forecast to have picked up again in June. The federal excise tax cut drove further declines in fuel prices; however, inflationary pressures are likely to have risen across housing and services. 

For the monthly series, headline inflation is forecast to come in around 0.4% month-on-month, with the annual pace rising from 4% to 4.2%. Underlying or trimmed mean inflation is also expected to come in at 0.4% month-on-month, firming from 3.4% to 3.6% year-on-year.

More market reaction is likely to be generated by the quarterly figures. A 0.7% lift in the quarter is expected to see annual headline inflation ease from 4.1% to 4%; however, the trimmed mean is anticipated to rise 0.9% quarter-on-quarter, increasing the year-on-year pace from 3.5% to 3.7%. By comparison the RBA's most recent forecasts from May had headline inflation running significantly higher at 4.8%, and the trimmed mean a touch stronger at 3.8%.   

Macro (Re)View (24/7) | Renewed risks

Mounting supply concerns amid near on two weeks of strikes in the Gulf saw Brent crude oil rise to highs since May above $100/bbl before it fell back to close around $93/bbl on Friday. Renewed inflationary concerns underpinned higher UST yields and USD strength, with markets looking toward next week's meeting by the Federal Reserve for more insights on how tolerant the institution now led by Chair Warsh will be to inflation running above target. Despite posting strong results, investors remain uncertain over the ability of the hyperscaler businesses (including Google, Amazon and Meta) to generate adequate returns from surging capex investment.    

 

The ECB left its key interest rates, including the depo rate (2.25%), unchanged this week as widely expected. While President Lagarde said at the press conference the decision was unanimous, post-meeting reporting indicates the ECB is on track to hike in September in follow up to the hike in June. Inflationary risks that appeared to be easing in recent weeks have been renewed by the re-escalation of conflict in the Gulf. Accordingly, the ECB changed its risk assessment, with Lagarde saying there were now downside risks to growth and upside risks to inflation whereas previously the risks were seen as broadly balanced, partly as a response to the June rate hike. 

In the UK, data for May reaffirmed labour market weakness though inflationary pressures remained persistent in June. The BoE has been placing more weight on the former and unless that changes, rates in the UK are set to stay on hold. Payrolled employment declined in May (-4k) as the estimated unemployment rate held steady (4.9%). Meanwhile, headline inflation slowed from 2.8% to 2.6%yr (vs 2.7% forecast); however, both annual core and services inflation came in 0.1ppt above estimates at 2.6% and 3.6% respectively.   

Strong Australian jobs growth in June revamped hawkish bets on the rates outlook, even though the unemployment rate is tracking above the RBA's forecasts. Pricing for an August rate hike has increased to around a 33% chance from around 20% previously, while pricing for a 25bps hike by year-end is now essentially fully discounted. Next week's key inflation report for the June quarter will likely have the final say ahead of the next RBA meeting on August 10-11. 

The labour market added 76.3k jobs in the month, beating modest expectations (15k) as well as keeping the unemployment rate anchored at 4.4% amid a large increase in labour force participation (67%). However, employment was bolstered by a large number of people employed in prior months starting work in June. 

Meanwhile, the unemployment rate averaged 4.4% in the quarter, slightly above the RBA's forecast for 4.2%. Additionally, increased levels of underemployment (6.5%) and underutilisation (10.9%) to highs since 2024 and 2021 respectively were also signs consistent with reduced labour market tightness. More detailed analysis of the report is available in my review here. 

Australian employment 76.3k in June; unemployment rate 4.4%

Australia's unemployment rate held at 4.4% in June following the strongest rise in employment in over 12 months. Employment surged by 76.3k - well above the expected increase of 15k - helping to absorb a sharp jump in labour force participation (67%). The report boosted pricing for an RBA rate hike in August from around a 1 in 5 to a 1 in 3 chance; however, the unemployment rate is actually rising slightly faster than forecast by the RBA, while broader measures indicate that labour market conditions may not be as tight as it previously assessed.    

Employment rose by a well above consensus 76.3k in June, its strongest increase since the 104k surge in April last year. Both major segments contributed: part time up 47k (now up 83.9k over the past two months) and full time 29.3k. The ABS noted in today's release that a large number of people who were waiting to start in work in May was a factor in the upside result.  

In addition to the June numbers, backward revisions were positive, with employment in May lifted to 44k (from 40.3k previously) while the decline in April was reduced to 38.6k (from -40.7k). Taken together, employment increased by 81.7k or 0.6% in the quarter, its strongest rise since Q3 2024. The 3-month average for employment gains jumped to 27.2k having slowed to just 8.6k in May. Through the first half of the year, employment increased on average by 26.9k per month. Volatility from one month to the next has been elevated but momentum in the latest quarter and for the year to date suggests employment is rising at a solid pace.  

The sharp rise in employment helped to absorb a very large increase in the labour force (89.1k) in June as the participation rate rose from 66.7% to 67%, a 10-month high. This saw the unemployment rate hold at 4.4% in June. While this was in line with its average for the quarter as a whole, it rose from 4.2% in the March quarter. This also sees unemployment tracking slightly above the RBA's forecast trajectory (4.2%). Additionally, upward revisions to prior months and increases in June lifted the broader underemployment rate to 6.5% and total underutilisation to 10.9%, their highest levels since August 2024 and December 2021 respectively. 

Rounding out the report, hours worked again surprised rising by only 0.2% in the month, underperforming the increase in employment (0.5%). However, the two were closer in sync across the quarter, with hours worked up 0.5% to go alongside the 0.6% rise in employment.  

Preview: Labour Force Survey — June

The latest update of Australian labour market conditions is due today (1130 AEST). A modest rise in employment of 15k is expected to hold the unemployment rate steady at 4.4% in June. Market pricing places only around a 20% chance of an RBA rate hike in August, rising to around 75% by year-end. If there is to be a hawkish revamp of those expectations, next week's key quarterly inflation data is far more likely to be the catalyst than today's report.    

June preview: Steady as it goes 

Expectations for employment have dropped back to a 15k rise in June - roughly half the gain forecast last time out - though the band of estimates covers a significant range (0-50k). The higher consensus figure for May was driven by expectations for a seasonal rebound in employment after Easter. The unemployment rate is forecast to print at an unchanged 4.4% (range: 4.3-4.5%).    

May recap: Employment surges drives unemployment rate down   

Employment posted its strongest increase of 2026 rising by 40.3k in May - but only after falling by 40.7k in April amid the Easter holiday period. That saw the unemployment rate fall back to 4.4% after it rose to 4.5% in April, its equal highest since late 2021, while labour force participation lifted to 66.7% from 66.6%. Hours worked were again the surprising aspect, falling 1.1% in May despite the sharp increase in employment, reversing its 0.9% rise in April when employment fell. 

May's increase in employment was heavily weighted towards the part time segment (35.2k), though full time also contributed (5.2k). While recent outcomes have been volatile, employment has largely been in a holding pattern. Employment gains are averaging around 15k per month this year and only around 6k for the past three months. 

Macro (Re)View (17/7) | Renewed concerns

An AI-related breakthrough in China renewed concerns over lofty tech sector valuations and proved a stronger headwind for equity markets this week than rising oil prices amid the re-escalation of hostilities in the Gulf. The Nasdaq fell nearly 3% this week, while Asian markets saw much steeper declines of 6-8%, as investors worried that the potential emergence of lower-cost AI models could undermine the returns from the ongoing capex boom in data centres. WTI Brent crude lifted more than 15% to around $82/bbl, its highest levels in a month. Despite this, UST yields declined as pricing for Fed rate hikes moderated after inflation data for June was cooler than expected - but multiple Fed officials, including Chair Warsh said inflation risks have not abated. USD upside, having rallied more than 3% over May and June, remained capped. 

Fed rate-hike expectations for the July meeting have eased from around 40% to a 10% chance after US inflation pressures eased and retail sales were moderate. One Fed hike is expected this year. With gasoline prices falling by almost 10%, headline inflation declined by 0.4% in June, slowing the annual rate from 4.2% to 3.5%. The core rate also softened from 2.8% to 2.6%yr on a flat month-on-month figure. This was subsequently backed up producer prices also falling in June (-0.3%) and rising less than expected after excluding food and energy (0.2%). Retail sales rose 0.2%m/m in June, well down from May's 0.9% gain, though lower gasoline prices were the main driver. However, control group sales - a gauge that remove gasoline and other volatile items - also slowed to 0.5%m/m from 0.8% in May. 

Re-escalating hostilities in the Gulf and renewed pressure on oil prices have come at a time where energy inventories in Europe are causing some concern. While the ECB is expected to hold steady at next week's meeting, this backdrop keeps the chance of further tightening in play. The ECB have strongly pushed back on views that the hike last month was an insurance hike, while the June forecasts also incorporated at least two rate hikes. In the UK, BoE Governor Bailey said that the fragile situation in the Gulf presented risks to the UK outlook. Meanwhile, Gilts responded favourably to reports that PM in waiting Burnham may appoint a more fiscally conservative Chancellor.

Macro (Re)View (10/7) | Hostilities renew

Hostilities in the Gulf flared up again this week with President Trump declaring the ceasefire was over. But with talks continuing, markets have been unbothered for now by a sharp reduction in shipping flows through the Strait of Hormuz. Brent crude oil touched midweek highs above $80 before closing around $75 on Friday, up more than 4% over the week. With the situation fragile, inflation risks persist. That was reflected in further increases in US Treasury yields, driven also by the FOMC meeting minutes noting 'almost all' participants saw rate hikes as necessary unless inflation pressures ease. The RBNZ reached that point this week, hiking by 25bps and indicated rates may rise further. 

Last week's soft US employment report (nonfarm payrolls +57k, unemployment rate 4.2%) left little lasting damage to Fed rates pricing for a rate hike by year-end, in part due to this week's hostilities in the Gulf pushing up oil prices. The minutes from the FOMC's meeting last month reaffirmed that the Fed under new Chair Warsh will at least sound less tolerant to above-target inflation. 

In Europe, the account of the ECB's June meeting where it increased rates by 25bps cast the move as a necessary step, pushing back against the notion of it being an insurance hike. That was backed up by President Lagarde's latest comments, saying that there were signs of second-round effects from the oil price shock flowing through the economy. Over in the UK, the BoE published its semiannual Financial Stability Report, highlighting the resilience of markets to the Gulf conflict; however, AI-related risks and vulnerabilities in parts of the market, including private credit, had increased. Responding to recent speculation, Governor Bailey said there would be no change to current bank leverage rules around government bond holdings. 

On the domestic front, a speech from the RBA's lead economist Sarah Hunter outlined the policy trade-offs facing the central bank. Hiking into the current supply-related shock is a communications challenge as much as anything, given that risks to growth and the labour market appear to be weighted to the downside. Hunter said these considerations need to be weighed up but appeared to argue that because underlying inflation was already elevated it had less scope to be patient.