Australian housing finance rebounds in June quarter

New housing finance commitments declined in June but rebounded with momentum in the quarter overall. An upswing in housing prices and rising loan demand have outweighed the effect of higher interest rates in recent months.     

Housing Finance — June | By the numbers

• Housing finance commitments (ex-refinancing) fell by 1% month-on-month in June to $24.6bn, partly reversing May's 5.4% gain. Commitments are down 18.2% on 12 months ago.  
• Owner-occupier commitments were 2.8% lower on the month (from 5.1% in May) at $15.9bn, the level down almost 20% over the year. 
• Investor commitments posted a 2.6%m/m rise to $8.7bn - following a 5.9% lift in May - but were down 15% on a year earlier.  

Housing Finance — June | The details 

Despite declining in June (-1%), housing finance commitments have been in an uptrend over recent months; despite rising interest rates loan demand has picked up with the value of new lending rising by 4.4% in the June quarter. Banks' loan books to both owner-occupiers (3%q/q) and investors (7.1%q/q) have seen a rebound from a period of contraction in recent quarters. An upswing in housing prices amid tight supply and rising demand for housing (reflecting strong post-pandemic population growth) has underpinned the increased value of lending. But loan volumes have also risen, with strong increases seen in the June quarter for loans written to 'upgraders' (existing home owners) (7.2%) and first home buyers (9.3%).   

The chart below shows loan volumes (on a monthly basis) in the owner-occupier segment, noting that the ABS does not produce equivalent estimates of loan volumes for investors. 

Construction-related loans to owner-occupiers appear to have troughed, but it is very clear from this analysis that new builds have been out of favour (reflecting cost increases, lengthy building timeframes and weak sentiment), with buyers turning to existing stock for which supply has been very low relative to historical listing volumes. 

CoreLogic chart    

Refinancing has dipped in two of the past three months but remains at very elevated levels, averaging $20.1bn per month in the June quarter. Higher interest rates continues to drive demand for refinancing. 

Housing Finance — June | Insights

A solid rebound in housing finance for the June quarter reflects the underlying dynamics in the housing market. Strong population growth amid tight supply has supported an upturn in housing prices, despite higher interest rates. Refinancing remains around record levels in this backdrop.  

Preview: RBA August meeting

The RBA Board is once again set to consider either leaving the cash rate on hold (4.1%) or hiking rates by 25bps at today's meeting (decision due at 2:30pm AEST). Shaping as another finely balanced decision, I side with the Board leaving rates on hold, extending the pause from the July meeting. This preview covers 3 key aspects of today's meeting.

The decision

As has been the case since April, the discussion around the Board table will be on the relative merits of either holding rates unchanged or hiking by 25bps. The Board has landed on both sides of the argument over recent months - it held in April only to then hike in May and June before coming back to a hold in July - making it difficult to predict the outcome of today's meeting.  

There were, however, signs in the July decision that the Board may be prepared to extend its pause. The meeting minutes outlined that the members agreed there had already been a significant tightening in monetary policy (400bps) - with the full effects yet to flow through to the economy - and that the cash rate was "clearly restrictive" at the prevailing level.

There was also recognition that slowing growth and inflation presented downside risks to its economic outlook. CPI data out last week reported Australian inflation fell from 7% to 6% (year-ended, headline terms) in the June quarter, with the core rate also easing from 6.6% to 5.9%; these outcomes were softer than the RBA had anticipated in its previous forecast round in May. This - together with a sharp fall in retail sales in June (-0.8%) - may be enough to see the Board on hold today. In the alternative case, the Board may look at strong labour market conditions and elevated services inflation and judge that a hike is warranted after last month's hold.    

The outlook 

RBA staff will present an updated set of economic forecasts for the Board to factor into today's decision. While these forecasts won't be made public until the Statement on Monetary Policy is published on Friday, Governor Lowe's decision statement will likely provide an overview of the revised outlook. The key theme of the RBA being able to steer the economy on the "narrow path" Governor Lowe speaks about (avoiding a downturn) is likely to be maintained in the August outlook, implying the Board does not want to overtighten monetary policy. 

Much interest will be on the updated inflation outlook. In May, the RBA forecast it would take until mid-2025 for inflation to come back to the top of the 2-3% target band. On the back of last week's CPI report, the questions to be answered are whether inflation is seen coming back to the target band sooner (potentially late 2024) or if mid-2025 remains the timeframe, will it now forecast inflation to be closer to the midpoint (2.5%) of the target band by then. Either of these scenarios would help the Board explain a decision to leave rates on hold, if it chooses to go that way. 

The guidance 

Since May, the Board has been in a data-dependent mode, keeping its policy options open as it assesses economic conditions. The Board's guidance has been that "some further tightening of monetary policy may be required..." in order to return inflation to the target band "...within a reasonable timeframe" conditional upon "...how the economy and inflation evolve". Given the Board will receive updated forecasts, this guidance could be tweaked; however, the central message that further tightening remains possible seems likely to be kept intact. 

Macro (Re)view (28/7) | Tide turning on tightening

An upbeat week for market sentiment as the Fed and ECB - despite hiking rates - signalled more patience going forward, while optimism around stimulus measures in China was also a key factor. In other news, the Bank of Japan announced it would tweak Yield Curve Control, coming to the view its parameters needed to be made more flexible to sustain monetary easing with an outlook for meeting its inflation target remaining elusive. 

RBA pause may extend on declining inflation   

Slowing inflation and weak retail sales data saw markets price out the chance of an RBA rate hike to around 1 in 4 ahead of next week's meeting. While lagging behind global trends, a disinflationary process is starting to play out more clearly in Australia. Headline CPI (0.8%q/q) fell from 7% to 6%Y/Y and the core rate (0.9%q/q) eased from 6.6% to 5.9%Y/Y, both well down from their 2022 peaks of 7.8% and 6.9% respectively (reviewed here). 

To date - and similar to offshore - disinflation in Australia centres on goods, with services prices remaining elevated. Goods inflation declined from 7.6% to 5.9%Y/Y, though with services inflation still rising after ticking up to 6.3%Y/Y from 6.1% this could yet prove the decisive factor for the RBA next week. However, a 0.8% fall in June retail sales may indicate to the Board that the balance risks with regards to monetary policy could be tilting towards over-tightening, particularly with the cumulative effects from its tightening cycle yet to flow through.  

End of the line for the Fed? 

The Fed's FOMC left markets with few surprises at this week's meeting. After holding rates steady last month, the Committee resumed its tightening cycle with a 25bps increase to a 5.25-5.5% range. Whether this marks the peak rate remains the key question. Taking a data-dependent outlook, the FOMC maintains that it could follow through with the additional tightening it signalled in its June projections; however, the data could make the case against that scenario. FOMC Chair Jerome Powell delivered a nuanced message in the post-meeting press conference by highlighting that with rates taken further into a restrictive setting, patience was now appropriate in returning inflation to the 2% target, allowing the lags from their earlier hikes to play through and also recognising that some additional tightening in credit conditions associated with the regional bank failures in the US is likely. 

Price and wage pressures in the US are easing, while GDP growth surprised to the upside in Q2 (0.6%), the data overall indicating a soft landing remains on track - provided the Fed does not overtighten. Underlying inflation on the core PCE deflator declined from 4.6% to 4.1%yr in June, a low back to September 2021. Meanwhile, amid strong labour market conditions wages growth on the employment cost index softened to a 4.5% annual pace from 4.9% previously. In isolation these are elevated rates for prices and wages, but they are trending in the right direction - particularly for a Fed prepared to be more patient. 

ECB out for the summer 

While the ECB hiked its key rates by 25bps this week (to 3.75% on the depo rate), it headed for its summer break leaving markets with the message that further tightening is no longer a foregone conclusion. A backdrop of deteriorating growth - July's flash PMI reported euro area activity contracted at its fastest pace in 8 months in July - and cooling inflation - headline rate (5.5%) having roughly halved from its peak - has prompted a more nuanced tone on the outlook for policy from the ECB. Reflecting this, the wording in the Governing Council's decision statement was tweaked slightly to state that rates will be "set at..." (rather than "brought to" used previously) "sufficiently restrictive levels for as long as necessary..." to hit the 2% inflation target.

In the post-meeting press conference, ECB President Christine Lagarde said the Governing Council was now "deliberately data-dependent" and that it has an "open mind" about what decisions it will make at the next meeting in September and in the meetings after that. Notably, over the summer break, the ECB will have the benefit of two additional incoming inflation reports that will be key inputs to a revised set of economic projections that will be presented to the Governing Council to consider at its next meeting. President Lagarde said those projections and further information on how tighter monetary policy is working through the economy will determine whether the Governing Council hikes rates or holds steady. 

Also of note, the ECB announced it would cut the interest paid on the threshold of reserves banks are required to have on hold at their national central banks. These reserves are currently remunerated at the depo rate (3.75%) but this will be cut to 0% in late September, a move the ECB says will improve the "efficiency of monetary policy" implementation by reducing its interest bill. The reason for the change is that the ECB notes that with ample liquidity in the financial system, monetary policy is being transmitted via its deposit facility - where banks park their excess reserves (those over and above minimum thresholds) - with these balances being remunerated at the depo rate. 

Australian Q2 CPI 0.8%, 6.0%Y/Y

Australian inflation declined from 7% to 6% in year-ended terms in the June quarter, a downside surprise on expectations (6.2%). Global disinflationary forces are becoming more evident in prices in Australia; however, domestic impulses to inflation from services prices have firmed further. 

Consumer Price Index — Q2 | By the numbers 

• Headline CPI was 0.8% in the March quarter, below expectations (1%) and down from a 1.4% rise in the previous quarter. Year-ended inflation fell from 7% to 6% (vs 6.2% expected). 

• The average of the three underlying CPI measures was 0.9% quarter-on-quarter, softening from 1.3% in Q1. This lowered the annual pace from 6.6% to 6%. 

• The key trimmed mean measure printed 0.9% for the quarter, below consensus (1.1%) and down from 1.2% previously. This left the year-ended pace at 5.9% (vs 6.0%) from 6.6%.

Consumer Price Index — Q2 | The details 

Australian inflation posted its softest quarterly outcomes in nearly two years in the June quarter. The headline CPI slowed to 0.8% quarter-on-quarter from 1.4% in the March quarter, while the key gauge of underlying inflation (trimmed mean) eased to 0.9%q/q from 1.2%. Year-ended inflation declined from 7% to 6% on headline, a low back to Q1 2022, while the core rate came down from 6.6% to 5.9%, its slowest in a year. 

The easing of inflation in the June quarter was driven by price falls in domestic holiday travel (-7.2%) - associated with off-peak discounting; electricity (-1.8%) - reflecting state government rebate schemes; and fuel (-0.7%) on lower diesel prices. 

The main contributors adding to inflation in Q2 were: rents (2.5%) - its strongest quarterly rise since 1988 reflecting very low capital city vacancy rates; overseas holiday travel (6.2%) as demand for summer travel in Europe surged; and eating out and take away services (7.7%) with these businesses passing higher costs (food and overheads) through to customers. While durable goods had contributed to lower inflation in the March quarter, a reversal of price discounting by retailers and new winter stock saw higher prices for furniture (4.9%) and clothing and footwear (0.6%).  

Now at 6%Y/Y, headline inflation in Australia is down from a peak of 7.8% at the end of 2022. This decline largely reflects disinflationary forces from offshore - eased supply disruptions in goods and commodity markets and softer demand - with headline inflation rates in many advanced economies down significantly from last year's highs. 

Because of this global disinflationary backdrop, the drivers of inflation in Australia are switching from global to domestic sources. Tradables inflation (goods and services prices influenced by supply-demand dynamics offshore) slowed from 6.1% to 4.4%Y/Y. That compares to non-tradables inflation (prices determined by domestic factors) at 6.9%Y/Y, though this looks to have peaked having fallen from Q1 (7.5%).

  

The main theme playing out in Australian inflation is similar to what is occurring offshore: goods inflation is slowing rapidly but services inflation is remaining more persistent. Goods disinflation gathered pace in the June quarter, with the goods CPI falling from 7.6% to 5.8%Y/Y, down from a cycle peak of 9.6%. In contrast, services inflation has yet to peak, firming from 6.1% to 6.3%Y/Y. A key aspect of services inflation is labour cost pressures stemming from the strong labour market.  

Consumer Price Index — Q2 | Insights 

A welcome decline in inflation in the June quarter, with Australia's headline (6%) and core rates (5.9%) coming in comfortably below expectations. These declines make things interesting ahead of the RBA's meeting next week. The Board could choose to extend its pause from the July meeting on the back of today's report or it could opt to hike by 25bps if it chooses to focus on the firming in services inflation. This shapes as another tight call, with risks that the decision could fall on the side of an August hike. 

Preview: Australian Q2 CPI

Today's June quarter inflation report (due 11:30am AEST) will go a long way to determining how much further the RBA's tightening cycle has to run. Inflation in Australia peaked at the end of 2022 but remains elevated, with domestically generated price pressures yet to abate.  

Inflation started to soften from cycle peaks in the March quarter... 

Inflation softened in the March quarter, confirming the peak came in late 2022 at 30-year highs. Headline CPI was 1.4% in the quarter - slowing from 1.9% in the previous quarter - resulting in the annual pace sliding from 7.8% to 7%. Trimmed mean CPI - a key gauge of core inflation - was 1.2% quarter-on-quarter (from 1.7%) to be 6.6% over the year, down from the 6.9% peak in the December quarter. 

The decline in Australian inflation in early 2023 reflected disinflationary forces from offshore. Tradables inflation - goods and services whose prices are influenced by global factors - slowed materially to 0.3%q/q (from 1.5%) on the back of price falls for international travel (-8.2%), clothing and footwear (-2.6%) and fuel (-0.8%), with the annual pace in at 6.1% from 8.7%. Non-tradables inflation - reflecting domestically generated price pressures - remained elevated at 1.9% in the quarter (from 2.1%) and 7.5% over the year; key contributors in the March quarter were domestic travel (4.7%), medical services (4.2%), and tertiary education (9.7%).   

... and markets expect inflation to decline further in Q2

Headline inflation in the June quarter is forecast at 1% (range: 0.6% to 1.4%), with the annual pace expected to slow to 6.2% from 7%. The ABS's monthly CPI indicator suggests these expectations should be around the mark. As a proxy for the quarterly figure, the 3-month change in the headline CPI to May was 0.9%. For annual inflation, outcomes of 6.3% in March, 6.8% in April and 5.6% in May average out at 6.2% over the period. Forecasts for trimmed mean inflation sit at 1.1% in the quarter and 6% over the year.  

Look out for services inflation, which is key for the RBA 

There are a few key factors to highlight going into the report. Given the drivers of inflation in Australia are rotating from global to domestic factors, the RBA has emphasised that trends in services prices will be a major influence on the timeframe in returning inflation to the 2-3% target band. Rising services prices partly reflects labour cost pressures stemming from a strong labour market and are seen by the RBA as posing a risk of sustaining above-target inflation. In this respect, rents are another component under close watch. Rent inflation is rising with a lag and will be adding to measured inflation through the back half of the year. 

Also in today's report, keep an eye on electricity prices. The monthly CPI gauge has been reporting a slowing in household electricity inflation, consistent with state government rebates coming into effect; however, electricity prices are set to rise in the September quarter after the regulator approved large increases to the Default Market Offer (that effectively works as a price cap on electricity bills in certain states) for 2023/24. 

Macro (Re)view (21/7) | Looking to the week ahead

Attention set firmly on key central bank meetings next week (Fed, ECB and BoJ) meant that it was a relatively quiet week for markets. Some strength returned to the US dollar as activity data in China disappointed. Meanwhile, an improved UK inflation report saw the FTSE index rising more than 3% on the week, with markets now pricing a materially lower peak interest rate from the BoE. These dynamics offshore drove a lower Australian dollar, outweighing a rise in expectations for another RBA rate hike on the back of strong labour market data.

After finding renewed momentum in May, the Australian labour market showed further strength in June (reviewed here). Employment increased by 32.6k, well above the 15k consensus and coming off the back of the strongest rise in 11 months in May (76.5k). Robust labour demand saw the unemployment rate hold around half-century lows at 3.5% (unchanged from May) as labour force participation - despite easing 0.1ppt to 66.8% in June - remained around record highs. Rapid post-pandemic inward migration is clearly adding to labour supply but also appears to be supporting employment as well. Momentum in employment growth was a solid 3.1% annualised in the June quarter, a pace that exceeded growth in the labour force on an equivalent basis (2.8%). 

The June report saw pricing for an RBA rate hike in August jump to around 40% from 25% pre-release. While the Board left rates on hold earlier this month, the meeting minutes outlined that a 25bps hike had come under consideration, mainly due to risks to the inflation outlook. However, the Board elected to hold, seemingly awaiting next week's Q2 CPI report. The minutes noted that the July hold came as the discussion around the Board table focused on the balance of risks between under-tightening and over-tightening. Interest rates were assessed to be "clearly restrictive" at 4.1% and policy lags meant the full effects of the tightening cycle had yet to play out. However, the Board remains alert to inflationary risks stemming from the services sector and labour cost pressures associated with the strong labour market.  

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In a relatively quiet week offshore, key data from China came in on the soft side of expectations as the momentum from the Covid reopening showed further signs of fading. June quarter GDP slowed to 0.8% from 2.2% in Q1, leaving year-ended growth at 6.3% against 7.1% anticipated. Retail sales (3.1%yr) also disappointed, but an upside result came through for industrial production (4.4%yr).

Over in the US, while headline retail sales at 0.2% in June missed expectations (0.6%), control group sales - considered a better gauge of underlying spending - posted an upside surprise rising by 0.6% (vs 0.3%). Resilience in US consumer spending remains evident supported by a strong labour market and improved purchasing power from real incomes with inflation cooling materially. 

Declining UK inflation saw markets scale back pricing for a second consecutive 50bps rate hike from the Bank of England. Only last week, an acceleration in wages growth led to a 50bps hike coming close to being fully priced for the August meeting, but prospects for a 25bps increase received a boost after CPI data for June came in weaker than expected. Headline CPI (12-mth) slid from 8.7% to 7.9% (below the 8.2% consensus figure) and the core rate softened from 7.1% to 6.9% (vs 7.1%); June's month-on-month inflation outcomes (0.1% headline and 0.2% core) were the slowest since the start of the year. Encouragingly, services inflation showed tentative signs of easing (7.2% from 7.4%) while goods disinflation continued (8.5% from 9.7%). 

Australian employment 32.6k in June; unemployment rate 3.5%

Australian employment increased above expectations in June to back up May's very strong rise. Robust labour demand saw the national unemployment rate remaining around half-century lows at 3.5%, with labour force participation around record highs.  

Labour Force Survey — June | By the numbers

• Employment increased by 32.6k (on net) in June, above the 15k consensus but moderating from a surge of 76.5k in May (revised up from 75.9k). 

• National unemployment rate came in at 3.5%, unchanged after the rate in May was revised down in today's report from 3.6% initially reported. The broader underemployment rate remained at 6.4% while total underutilisation fell from 10% to 9.9%. 
• Labour force participation rate eased off May's record high (66.9%) to 66.8% in June; however, the employment to population ratio (share of working-aged Australians in work) remained at 64.5%, its highest level on record.  

• Hours worked lifted by 0.3% in June to be up by a very robust 2.9% in the quarter.

Labour Force Survey — June | The details

Renewed strength in the Australian labour market in May has extended into June, with the key details in today's report coming in on the upside of market expectations. As anticipated (see here), employment showed further strength rising by 32.6k in June following what was the largest rise in 11 months in May (76.5k). This month, full-time employment increased by 39.9k but part-time employment declined by 6.7k.  

For the June quarter, employment increased by 105.3k, averaging a solid rise of 35.1k per month. While quarterly employment moderated from a very robust Q1 (149k) it far exceeded the gains from the final two quarters of 2022 (76.7k in Q3 and 78.9k in Q4). In a post-pandemic environment where inward migration has driven rapid growth in the working-age population (2.9%yr), momentum in employment growth remains solid annualising at a 3.1% pace in the June quarter. 

Robust labour demand continues to underpin an unemployment rate that remains around half-century lows and a participation rate sitting on record highs. Unlike many other countries, Australia has a much higher level of labour force participation coming out of the pandemic and that has been a key factor that has contributed to more moderate wage pressures and ultimately lower interest rates relative to offshore. 

Monthly hours continue to show a volatile profile; however, June's rise (0.3%) left hours worked up by a sharp 2.9% for the quarter. That compares to a weak outcome in the March quarter (-0.2%). 

Labour Force Survey — June | Insights

Today's report reflected a continuation of momentum in the labour market after it found renewed strength in May. Although the RBA kept rates on hold earlier this month, the Board's guidance reflects a willingness to tighten further. Given May's very strong labour market report did not prompt a hike at the July meeting, it appears the Board is awaiting next week's Q2 CPI data before deciding on its next move.

Preview: Labour Force Survey — June

Australia's Labour Force Survey for June is due to be published at 11:30am (AEST) today. Labour market conditions showed renewed strength in May as the unemployment rate fell back to near 50-year lows and the participation rate elevated to a new record high. A continuation of this momentum into June is expected in today's report. 

As it stands | Labour Force Survey

The labour market regained momentum in May after slowing around the Easter holiday period; employment surged by 75.9k - its strongest rise in 11 months and well above the consensus estimate (17.5k) - following a 4k fall in April. Gains in both full time (61.7k) and part time (14.3k) employment were posted in May. 

Reaccelerating employment saw the unemployment rate fall from 3.7% to 3.6% - just off a half-century low in Australia - and came alongside a rise in the participation rate from 66.7% to 66.9%, a new record high. While there has been some loosening in the labour market with the underemployment rate (6.4%) and total labour force underutilisation (10.0%) rising in recent months, these measures remain at historically low levels. 

Despite the strength in the May report, hours worked were reported to have fallen by 1.8% in the month; however, that followed April's surprising increase (2.7%) when more than 5 million Australians were estimated to be on annual leave over Easter. Overall, hours worked are tracking 0.9% higher through the June quarter. 

Market expectations | Labour Force Survey

Employment is anticipated to rise by 15k in June, around a wide range of estimates from -10k to 36k. The ABS's high-frequency series reported a 0.1% rise in the payrolls index through the first two weeks of June, indicating a continuation of momentum in the labour market from May. That suggests the risks are tilted to an upside result for employment in June. Meanwhile, the unemployment rate is expected to hold at 3.6% (range: 3.5% to 3.7%), based on an unchanged participation rate (66.9%). 

What to watch | Labour Force Survey

After the May report, the key question is whether the momentum in the labour market was sustained into June. As alluded to above, I think that is likely to be the case and anticipate the employment outcome to exceed the modest consensus figure. The rapid pace of growth in the working-age population, I think, will remain a support for employment. For June, there is a risk that hiring by firms may have slowed into the end of the financial year. However, even if this were to be the case, job vacancies - despite moderating from their peaks - remain elevated and are consistent with robust labour demand. 

Macro (Re)view (14/7) | A week is a long time

Encouraging US inflation data drove a complete reversal of last week's market dynamics, coming with renewed optimism the Fed can avoid a recession and steer the economy to a soft landing. Bond yields retraced after steeping sharply last week, resulting in material US dollar weakness and a strong rebound across global equities.  

US disinflation broadens  

The Fed's tightening cycle could be wound up as early as the end of the month amid signs of a material slowing in the US inflationary pulse. While the Fed has been communicating a further 50bps of rate hikes could be forthcoming, markets sense a final 25bps hike in late July will be the peak for rates ahead of an extended pause. This comes after June's CPI readings came in soft relative to expectations, with both the headline and core measures printing at 0.2% month-on-month; these outcomes drove sharp falls in annual inflation as headline CPI fell from 4% to 3% (27-month low) and the core rate eased from 5.3% to 4.8% (20-month low). Crucially, inflation in core services ex-housing - the components of inflation that have proved least sensitive to rising interest rates - cooled further to 4.0%, well down from last year's 6.5% peak. This may signal to the Fed that the disinflationary process occurring has broadened out sufficiently for it to soon leave rates on hold and allow the lags in the transmission monetary policy to do the rest of the tightening needed to return inflation to the 2% target.  

Sweeping change at the RBA 

In Australia, sweeping changes at the RBA dominated news this week. After months of speculation, the Federal Government announced RBA Governor Philip Lowe's tenure will not be extended, appointing the current Deputy Governor Michele Bullock to lead the central bank from mid-September. The recent RBA review has also prompted a raft of operational changes to be ushered in from next year. Speaking in Brisbane, Governor Lowe outlined the recommendations the policy-setting Board has agreed to implement. 

Most notably, the RBA will depart from its schedule of monthly meetings it has maintained since 1990, moving to an arrangement of 8 meetings per year (from 11), with each decision to be accompanied by a post-meeting press conference. Also, the quarterly Statement on Monetary Policy (that includes the RBA's economic forecasts) will be released alongside the relevant decision (February, May, August and November), rather than with the 3-day lag that has been the usual practice; this is an important change that will assist the Board in giving more detailed and timely explanations of its decisions and also brings the RBA into alignment with other central banks in this aspect.   

Governor Lowe also spoke on monetary policy, reiterating that the Board is in a data-dependent mode, yet to reach any conclusion on whether rates were appropriately calibrated to return inflation to the 2-3% target band. A key update on the labour market is on the calendar next week ahead of Q2's CPI report in the following week.     

Inflation risks keeping the ECB on guard

The account of the ECB's June meeting summarised the Governing Council's intention to tighten monetary policy further. Upside risks to the ECB's inflation outlook associated with wage-price dynamics led the Governing Council to conclude that rates were not yet at a sufficiently restrictive level. With that in mind, the account prescribed the continuation of a "gradual tightening path", giving recognition to the balance of considerations between further rate hikes and allowing the full effects of past tightening to transmit to the economy. 

Pressure remains on the BoE 

Another robust update on the UK labour market, including an acceleration in wages growth, puts the prospect of another 50bps rate hike from the BoE on the table for August, following the June decision to reaccelerate the pace of tightening. Although the unemployment rate ticked up from 3.8% to 4.0%, employment (102k) and wages growth (ex-bonuses) (7.3%) surprised to the upside of expectations in the May report. Meanwhile, the BoE published its half-yearly Financial Stability Report this week. The report outlined that risks lay ahead as the large share of fixed-rate mortgages are refinanced at much higher rates, but highlighted the banking system was well capitalised and profitable, and regulatory changes from recent years had been effective in preventing a rise in households facing mortgage stress. 

Macro (Re)view (7/7) | Steepening pressure

Bond yields tested their March highs seen prior to the SVB collapse in the US resulting in equity markets pulling back this week from recent strength. In spite of this, US dollar strength was notably absent, helping support a rise in the Australian dollar even as the RBA surprised somewhat by leaving rates on hold this week. Highlights on next week's calendar include June's CPI report in the US, rates decisions in Canada and New Zealand and in Australia Governor Lowe will speak on monetary policy. 

Signs of slowing in the US labour market

For the first time in 15 months, US nonfarm payrolls came in weak relative to expectations. June nonfarm payrolls printed at 209k - still a solid outcome - but below the 230k consensus and the slowest increase since December 2020. Furthermore, revisions saw 110k subtracted from payrolls over April and May. Separately, job openings, while still elevated, declined by around 500k to 9.8 million in May. But, overall, the labour market remains strong; the unemployment rate declined from 3.7% to 3.6% to be just above 50-year lows and the participation rate in the major (25-54 years) category ticked up to 83.5%, its highest since 2002.

As noted in the minutes of the FOMC's June meeting, its inclination is that further rate hikes are likely; some members, in fact, made the case for a June hike, but ultimately the decision to leave rates on hold was unanimous. Back to the payrolls report, average hourly earnings were running at 4.4% over the year to May, around the sort of pace the FOMC observed in the minutes was above being consistent with its 2% inflation target, based on current trends in productivity growth. The FOMC's projections from the June meeting showed an expectation for a further two rate hikes to a peak of 5.5-5.75%.   

RBA holds but likely to hike further 

The RBA left its cash rate on hold at 4.1% this week, a somewhat surprising decision given its recent hawkish messaging. Governor Lowe's statement seemed to convey a more cautious analysis on this occasion; the Board recognising the risk of overtightening into an economic outlook that was uncertain and with the full effects from its substantial hiking cycle (400bps) still in the pipeline (see more here). The Board, however, left its guidance that further tightening "... may be required" intact and that it remained alert to signs of high inflation becoming more persistent, particularly through adjustments to price and wage-setting processes. Markets sense a rate hike could be forthcoming at the August meeting when the RBA will also update its economic projections. Key inputs to inform the decision will be June's labour force survey (20/7) and Q2's CPI report (26/7). 

Data through the week showed further strengthening in the Australian housing market. Constrained supply - CoreLogic reporting listing inventories are 25% below average levels - at a time of rapid population growth is pushing prices higher. Nationally, housing prices lifted by 1.1% in June to be up a little more than 3% from February's trough. These dynamics were reflected in a sharp 4.8% increase in housing finance commitments in May (see here). Notwithstanding a rebound in May (20.6%), dwelling approvals remain at low levels consistent with headwinds to home building from cost increases, rising interest rates, and weak sentiment (see here). Also this week, the nation's trade surplus widened to $11.8bn in May as export earnings - underpinned by the major resources - remained elevated (see here).  

Erring on the side of caution for the ECB and BoE

Surveys of inflation expectations in the euro area and UK have reaffirmed that both the ECB and BoE respectively are likely to err on the side of tightening monetary policy too much than too little. The ECB's Consumer Expectations Survey reported that while households anticipate inflation to fall, inflation is expected to remain above the ECB's 2% target at the 12-month (3.9%) and 3-year (2.5%) horizons. Similarly, the BoE's Decision Maker Panel survey showed UK businesses see inflation on a declining trajectory, though at 5.7% on a year-ahead basis and 3.7% for the 3-year projection the outlook is for inflation to remain above the central bank's 2% mandate. While these surveys provide only one measure of inflation expectations (inflation is anticipated to fall closer to the ECB's and BoE's targets on other measures), they are consistent with the messaging from the ECB and BoE that additional tightening will be required.