Macro (Re)View (10/4) | Ceasefire unlocks rally

Equities soared this week and risk-sensitive currencies rallied following the Middle East ceasefire, as Brent oil futures (June) fell almost 14% to 4-week lows below $95/bbl. This is still a significant premium to its $60-70 trading range through January and February ahead of the conflict, reflecting uncertainty over how flows through the Strait of Hormuz will now unfold during the next couple of weeks. The largest equity gains came in Asia (net oil importers), while the US and Europe rallied for the second consecutive week. Higher oil prices are starting to impact inflation figures; however, hawkish expectations for rate hikes continue to ease. 

US inflation rose 0.9%m/m in March (as expected) as fuel prices recorded a record increase of 21.2%m/m. That drove the annual rate from 2.4% to 3.3% (highest since May-24), though markets expected a 3.4% figure. However, there was little sign of a broader spillover into prices as core CPI undershot expectations at 0.2%m/m (vs 0.3%), firming from 2.5% to 2.6%yr (vs 2.7%). The conflict ceasefire allowed markets to begin repricing Fed easing this year, with the CPI figures then giving it a further nudge, currently sitting at around 10bps of cuts. The FOMC minutes from the March meeting indicated the Committee would be patient in cutting rates amid the energy shock pushing inflation higher; however, consumers are clearly feeling the strain. Consumption data in February was weak - personal spending was softer than expected at 0.5%/m (nominal) and 0.1%m/m (real) - while the University Michigan Sentiment index fell to a record low (47.6) in March. 

In Europe and the UK, final PMI reads for March confirmed cooling growth and upside risks to inflation from higher energy prices. The euro area index (50.7) registered a 10-month low and the UK's posted its weakest expansion in 6 months. Amid energy and supply disruptions, firms were facing higher input costs while order books and confidence were also suffering. Rate hike pricing has pared back in both regions this week, though markets still lean towards the ECB and BoE raising rates by year-end.     

Lacklustre Australian household spending data ahead of the fuel price shock and back-to-back rate hikes has cast doubt over the RBA's excess demand narrative. Spending in February was only able to post a 0.3% rise, matching January's modest gain - on track for its softest quarter since the second half of 2024 (reviewed here). Annual growth was little changed at a 4.6%yr, a level pace with growth in both discretionary and non-discretionary categories - though there has been a strong leaning towards services spending (6.2%) over goods (3.1%). 

Australian household spending up 0.3% in February

Australian household spending was modest at the start of the year, with a 0.3% rise in February matching January's gain. This came ahead of the fuel price shock, while back-to-back hikes from the RBA will be a further headwind for consumers. Spending rose at 4.6% pace through the past 12 months, with growth in discretionary (4.6%) and non-discretionary categories (4.6%) running neck and neck.   

Household spending was up by 0.3% through the first two months of the year, largely ahead of the headwinds the consumer now faces from the fuel price shock and the RBA's tightening cycle. In February, the 0.3% rise in spending was led by discretionary categories (0.5%), including recreation and culture (1.1%) and hotels, cafes and restaurants (0.4%). Spending in essential or non-discretionary areas was flat (0%): spending increased on food (1%) and health (0.2%) but fell in transport (-0.4%). Higher fuel prices will show up in a significant increase in transport spending from March, but the main interest will be around the impacts this has on other categories.    

Spending across services rose 0.5% on the month, outperforming goods (0.1%). This trend has also been evident over the past year with services (6.2%) dominating goods (3.1%). However, one factor that has dragged on goods has been alcohol and tobacco (-12.2%), associated with the rise in illicit tobacco sales the ABS has been unable to account for. 

Macro (Re)View (3/4) | Sentiment rebounds

Equities were in a more buoyant mood this week amid optimism that the US and Iran were negotiating an off-ramp to the Middle East conflict. However, President Trump's address dashed hopes of any near-term shift, pushing front-month crude to fresh highs by the weekend at $112/bbl. Still, risk sentiment held up, sending the USD softer across the major pairs, while bond yields declined.  

US nonfarm payrolls rose by 178k in March, rebounding strongly above consensus (65k) after adverse weather and industrial action drove a 133k decline in February. The unemployment rate fell from 4.4% to 4.3%, though participation (61.9%) was down slightly on the prior month. Meanwhile, the wage component showed no concerns for inflation, easing to 3.5% yr from 3.8%. The report came on the back of other data points that were consistent with strength in the US economy ahead of the conflict. Retail sales lifted 0.6%m/m in February (0.5% expected) and the control group - a better gauge of the underlying strength in spending - rose by 0.5%m/m (vs 0.3%). The ISM manufacturing index rose to 52.7 in March, indicating activity in the sector was expanding at its fastest pace since mid-2022; however, the prices paid sub index accelerated (+7.8) reflecting the impact of surging oil prices.       

Euro area inflation surprised slightly to the downside in March, with the full effects from the energy shock yet to show. Headline inflation rose to 2.5%yr (vs 2.7% expected) from 1.9% in February, while the core rate eased to 2.3%yr against consensus for an unchanged 2.4% pace. ECB officials over the past week left the door open to raising rates but emphasised the duration of the shock and its second-round effects on prices and wages were key factors. A longer and more sustained shock would start to shift the outlook towards the more adverse scenarios the ECB outlined in its recent macroeconomic projections. 

Locally, the RBA's March meeting minutes shed further light on the internal hike-hold debate, revealing more division among members than initially appeared. A narrow 5-4 majority delivered a 25bps rate hike to 4.1%, while Governor Bullock later said all members supported the need for tighter policy - the only disagreement was on timing. However, the minutes outlined the key differences between the hike and hold camps. 

The more hawkish majority landed on raising rates due to the conflict adding to existing inflationary pressures, with policy viewed as not adequately restrictive. While acknowledging increased economic uncertainty and the possibility of slower-than-expected growth, their view was that weaker demand (if it eventuated) would help return inflation to target faster. By contrast, the less hawkish minority took a more cautious view, preferring to wait for greater clarity over the impacts of the energy shock. They also contested the assessment that the economy was operating with excess demand, highlighting inconsistencies in the consumption and labour market data.

Data this week indicated that the labour market was robust, with job vacancies rising by 2.7% for the 3 months to February, remaining a little above a 2% as a share of the labour force. Dwelling approvals surged almost 30% in February, though that appeared to be driven by approvals in the higher-density segment being held over during the summer holiday period (see here). The goods trade surplus widened sharply to $5.7bn in February, driven by surging safe-haven demand for gold exports (see here).  

Australia's trade surplus widens to $5.7bn in February

Record high non-monetary gold exports widened Australia's trade surplus to a 7-month high of $5.7bn in February. This was more than double January's surplus of $2.3bn (revised from $2.6bn) and well above expectations to print at $2.9bn. Nearly $8bn of non-monetary gold was exported in February, driving a 4.9% rise in total exports for the month. This occurred alongside a 3.2% fall in imports - its largest decline in almost 2 years - leading to the wider trade surplus. 

February's trade figures reported a $3.4bn widening in the trade surplus to $5.7bn, its highest since July last year. This latest result saw the 3-month average rise from $2.7bn to $3.8bn. In very volatile times for global trade, there have been opposing views around what this means for Australia, which has played out in the local dollar. The AUDUSD rose initially in response to the escalation of conflict in the Middle East and the subsequent closure of the Strait of Hormuz. This reflected expectations that surging oil and energy prices more broadly would boost Australia's terms of trade. However, this has since reversed with concerns over global growth ramping up - a headwind to the risk-sensitive AUD.  

MarketWatch chart 

Monthly exports rose by 4.9% in February to $45.6bn (8.9%yr). This came despite non-rural goods, a category dominated by the major resources (iron ore, coal and LNG), falling by 1.9%. As alluded to earlier, non-monetary gold exports were the major mover surging by 29.9% in the month to a new record high just below $8bn - effectively doubling over the past year on safe-haven demand. Rural goods were another key support lifting by 13.9% month-on-month (strongest rise since November 2024), following large increases across meat (26.8%), wool (13.1%) and other rural products (15.5%).  

Imports weakened by 3.2% in February to roll back to around $40bn, a level last seen during the middle of last year. By contrast to exports, non-monetary gold imports fell away (-41.3%) from earlier increases. Capital goods dropped by around 8% in the month, but over the past year the category has been strongly supported by equipment to fit out data centres. Meanwhile, consumption goods rose by 3.4%, broadly reflecting the strength in consumer demand the RBA has sought to cool by hiking rates in February and March. Following falls of more than 3% in the prior two months, intermediate goods rebounded with a 3.1% rise in February.  

Within intermediate goods, imports of fuels and lubricants fell 8.6% in the month to be down by 9.6% across the year. This is now clearly heading higher from March. For reference, fuel imports pressed highs of $6.5bn following the Ukraine war in 2022, with their current level in February being $3.7bn.  

Australian dwelling approvals surge in February

Australian dwelling approvals surged in February to their highest level since mid-2021, rebounding sharply from large declines around the turn of the year. Headline approvals jumped almost 30% month-on-month, following falls of 14.2% in December and 7.2% in January - nearly five times the expected rise of 6.2%. An inflow of unit approvals, notably in Victoria, was the key driver of today's outcome, with many approvals likely to have been held over from the summer holiday period. House approvals were broadly flat. Approvals lifted through 2025 helped by the RBA's easing cycle, but with that now reversing to a hiking cycle this momentum faces headwinds.

    

 

National dwelling approvals jumped by 29.7% in February, their largest month-on-month rise in 4 years to reach their highest level (19,022) since August 2021. By category, the volatile unit or higher-density segment (9,071) surged by around 94%, boosted by a huge volume of approvals from Victoria (429%) that were likely backlogged from the preceding months. House or detached approvals (9,951) - a much more stable category - were essentially unchanged (-0.2%).  

Across the past 3 months, headline approvals have averaged 16,500, with house approvals having gradually trended up to 9,900 - their highest since August 2022. The 3-month average for unit approvals is 6,600, around the middle of its range from the past year or so.   

The underlying detail showed broad increases across the range of higher-density approvals, with high-rise and townhouses the main contributors. 

As highlighted earlier, Victoria was the key driver where higher-density approvals rose well in excess of 400%. In the Victorian capital, unit approvals climbed to their highest level in 12 months. Unit approvals also increased very sharply in Western Australia (163%) and Queensland (102%).   

Macro (Re)View (27/3) | Timeline pressure builds on Hormuz reopening

Markets were left to weigh the daylight that exists between the US and Iran, leaving the Strait of Hormuz under its existing chokehold. With the conflict about to enter its 5th week, Trump's initial 4-6 week timeline is coming into focus - the White House maintaining the operation is ahead of Schedule as Iran put forward demands of its own. Brent crude dipped below $100/bbl this week on hopes for a ceasefire, but negotiations remain a long way from delivering that outcome - let alone reopening the Strait. US equities remained under pressure, while weak Treasury auctions put upward pressure on yields. Ongoing uncertainty has returned a safe-haven bid to the USD, weighing on the local AUD.  

In Australia, a speech from Assistant Governor Kent reinforcing the RBA's hawkish stance to the energy shock kept pricing for two further rate hikes this year supported. Meanwhile, markets effectively consigned some encouraging signs on inflation on the eve of the conflict to the history books. Speaking to an audience of market participants, Kent said the economic conditions and upturn in inflation since September last year had indicated that financial conditions were less restrictive than previously thought, necessitating the rate hikes in February and March. 

The conflict was framed by Kent as a supply shock that added additional risks to the inflation outlook and to inflation expectations the longer it persisted. The tone was very much reflective of the hawkish majority on the Monetary Policy Board following last week's split (5-4) decision. February's inflation data surprised to the downside as headline CPI eased unexpectedly from 3.8% to 3.7%yr while the trimmed mean or core rate held at 3.3%yr (reviewed here). Declining petrol prices ahead of the conflict were taking some heat out of the CPI basket, while underlying prices were at least stabilising.   

At the ECB Watchers Conference, President Lagarde said the current dynamics were different to the energy shock following in the Ukraine war in 2022: so far, the energy price surge was much less severe, demand conditions were currently weaker, and monetary and fiscal policy were now more neutral rather than stimulatory. Additionally, inflation has been around the ECB's target over the past year. Overall, Lagarde indicated the ECB will adopt a measured approach, but that tighter policy could be an option if inflation became expected to deviate 'significantly and persistently from target'.  

Market pricing in the UK remained strongly hawkish, implying 3 rate hikes this year. That reflects comments from BoE Chief Economist Pill that the uncertainty brought about by the shock was not a reason for policy inaction. Comments from other BoE members were more nuanced. Policy hawk Greene said there were greater downside risks to the economy in hiking now than in the previous tightening cycle in 2022, while the dovish member Taylor called for holding rates steady until greater clarity over the economic effects from the energy shock became evident.

Australian CPI 3.7% in February

Australian inflation softened slightly on the eve of the energy price shock coming in below expectations in February. Headline CPI was flat (0%) month-on-month, down from 0.4% in January, slowing the annual rate from 3.8% to 3.7% (vs 3.8% expected). In underlying terms, inflation remained above the top of the RBA target band (2-3%) with the trimmed mean measure (0.2%m/m) holding at 3.3%yr. Markets put the odds of a third consecutive 25bps rate hike in May at 67%. 

Headline inflation slowed in February to 0%m/m from 0.4%m/m in January, softening the annual pace from 3.8% to 3.7%. Ironically, petrol prices (-3.4%) were a key factor behind this - but this was prior to the escalation of the Middle East conflict - while domestic travel (-7.4%) post the summer holidays also played a role. 

Fuel prices had fallen significantly by around 7% over the year to February, making the current surge feel even more acute. Prices in February were down 3.4% after a 3.2% decline in January, with the last instance of back-to-back monthly falls of 3% coming in August (-3.1%) and September (-3.9%) of 2024. Alongside surging fuel prices, households are also facing significantly higher costs for electricity with government rebates rolling off. Across the past 12 months, electricity costs have risen 37%.  

Excluding the effects of volatile price changes, core inflation (measured by the trimmed mean) was broadly steady in February. The monthly rate was 0.2% and the annual pace was 3.3%, unchanged for the third month running. Overall, the momentum in core inflation is running above the target band (the RBA is required to hit the midpoint), with the 3-month annualised pace at 3.2%. Core inflation reflects more of the price pressures being generated by strong household demand, which the RBA in raising rates last week said it needed to temper.