Macro (Re)View (7/8) | Payrolls weaken Fed hike case

A risk-on tone was supported by reports of progress towards reopening the Strait of Hormuz and a weak US payrolls report, winding back Fed rate-hike expectations. Odds for a September Fed hike declined to around 40% from 55% after US employment surprised with a 23k decline in July. US 2 and 10-year Treasury yields stand almost 10bps lower than a week ago. Market pricing still implies a hike is anticipated by year-end, though upcoming inflation data will be key. The USD was soft falling 0.2% this week, meanwhile the USDJPY is trading almost 4% off its recent highs following joint intervention by Japanese and US authorities.       

Unexpectedly weak US employment data now sees markets expecting the Fed to hold rates in September, while also reducing rate-hike bets later in the year. Nonfarm payrolls fell by 23k in July, a significant downside surprise not only on consensus (+80k) but also on the low estimate in the survey (+40k). Including sizeable downward revisions of -103k to earlier gains in May and June, the 3-month average for nonfarm payrolls slowed to just 20k. 

While the data are highly volatile and subject to significant revisions, jobs growth at that pace over a sustained period would likely put upward pressure on the unemployment rate, notwithstanding that it fell from 4.2% to 4.1% in July due to lower labour force participation (61.4%). Many analysts put the breakeven rate - the level of employment growth needed to keep the unemployment rate steady - in the 25-50k range. Other US labour market data has also been soft. The job openings rate fell in June (4.4%), below expectations, and the employment index in the ISM services report flipped from an expansionary reading to contracting in July. 

In Australia, markets fully expect the RBA to hold the cash rate at next week's meeting, though one more hike before year-end is priced roughly as a 50/50 chance. The RBA left the cash rate steady (4.35%) last time out, pausing to assess developments after three straight rate hikes. It was a hawkish hold, however, with the Board stating that it was prepared to 'increase the cash rate target further if required'. Something similar is expected next Tuesday. 

The impacts of the Gulf conflict on inflation and growth remain unclear, but so far the more adverse scenarios in the RBA's May projections have been avoided. Those projections will be updated for this meeting. June's cooler-than-expected CPI report (headline and core CPI running at 3.9% and 3.6% year-on-year respectively) is likely to see the inflation outlook revised down, breaking the recent pattern of upward revisions. 

Meanwhile, growth has been resilient - reflected in this week's solid 0.8% rise in household spending in June (see here) - and labour market conditions are still likely to be considered tight, despite the unemployment rate averaging 4.4% in the June quarter, a little higher than previously forecast by the RBA. In other news, Australia's trade balance returned to surplus in June on the back of the fastest rise in exports in over 4 years (see here).    

Australia's trade balance returns to surplus in June

Australia's trade balance swung back to a surplus in June ($1.9bn) from a deficit in May (-$2.4bn), continuing its recent volatility. Non-monetary gold and iron ore drove exports to their fastest month-on-month rise (9.6%) since the start of 2022, overhauling imports that fell slightly (-0.2%). Although export earnings remain elevated, import spending almost drew level in the June quarter amid the Gulf conflict and oil price shock as well as the domestic data centre buildout, the driving factors behind the deterioration in Australia's trade position.  

 

The trade balance returned to surplus in June ($1.9bn) from a deficit in May (-$2.4bn, revised from -$3bn in today's release). Australia's 8-year run of trade surpluses was disrupted back in March following the oil price shock due to the conflict in the Gulf, though other factors had contributed to narrowing surpluses over the past couple of years, including tariff-related uncertainty and lower commodity prices. The trade surplus for the June quarter was just $1.1bn, narrowing from $5.8bn in the March quarter. 

However, rather than being driven by falling commodity prices, the recent deterioration in Australia's trade position has come from an unlikely source. Imports have surged - partly due to the oil price shock from the disruptions to supply in Gulf, but also from the data centre buildout. The chart below illustrates this point, showing a breakdown of international trade so far this year. Exports (green bars) have remained at elevated levels, but imports (yellow bars) have accelerated.

   

Turning to June's figures, exports rose by a sharp 9.6% to $48bn - the fastest rise since January 2022. Safe-haven demand supported non-monetary gold exports (60.2%), while an uptick in prices lifted the value of iron ore exports (6.2%). Over the quarter, exports increased by 4.2% to $138.3bn, with gains led by the major commodities: iron ore 7.6%, coal 19.3% and LNG 8.6%. Non-monetary gold pulled back over Q2 (-12.5%).      

Imports were broadly steady in June (-0.2%) coming in at $45.8bn. For the quarter, imports accelerated by 8.1% to $137.1bn as spending on fuel imports (part of intermediate goods) climbed almost 62%. However, in May and June, fuel imports declined by 8.3% and 11.9% respectively as tensions in the Gulf eased, allowing vessel traffic through the Strait of Hormuz to come back on line. 

After surging in recent months to facilitate the data centre buildout, capital goods imports have retraced, down 4.5% in June. ADP equipment has pulled back after almost tripling in March. 

Meanwhile, consumption goods softened in June (-0.8%) but was still up by 4.4% in the quarter, supported strong demand for vehicles (non-industrial transport equipment) (28.2%), notably EVs. 

Australian household spending rises 0.8% in June

Australian household spending rose by 0.8% in June, outpacing the 0.2% lift forecast by markets. Lower fuel prices due to the federal excise tax cut helped stave off cost of living concerns and higher interest rates, boosting distortionary-related spending. Excluding inflation, spending volumes increased by 0.7% across the quarter, rising solidly through the first half of the year (1.5%). The RBA is unlikely to hike rates next week; however, robust demand is a key factor that has helped sustain the Board's hawkish narrative.    

Household spending rose 0.8% nationally in June, driven by strong demand in discretionary-related categories (1.2%). Although spending slowed relative to May (1.2%) this latest outcome far exceeded modest expectations (0.2%) and was up 6% over the year despite a backdrop of economic headwinds and weak sentiment. Key gains in spending came in transport (3%) and recreation and culture (1.4%).  

Transport spending lifted 3% in the month, with the ABS reporting this reflected an acceleration in EV demand amid the fuel price shock, while airline travel rebounded to levels seen prior to the eruption of the conflict in the Gulf. Those dynamics offset declining spending on fuel as the federal excise tax cut continued to lower prices at the bowser.   

Meanwhile, households also spent up on tickets for upcoming concerts and live events, while increased gambling was linked to sporting events. These factors saw the recreation and culture category rise 1.4% in June.     

For the June quarter, household spending in volume or inflation adjusted terms rose by 0.7% to be up by 2.4% over the year. This follows similar growth in volumes in the previous two quarters of 0.9% and 0.8%, indicating that demand has held up despite higher interest rates, cost-of-living pressures renewed by the oil price shock and weak sentiment.  

A range of categories contributed to volume growth in the quarter including alcohol and tobacco (2.7%), furnishings and household equipment (1.7%), recreation and culture (1.7%) and hotels, cafes and restaurants (1%). 

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.