Independent Australian and global macro analysis

Friday, August 11, 2023

Macro (Re)view (11/8) | US inflation offers more encouragement

Risk aversion was the prevailing theme across markets this week, with growth concerns in China outweighing continued encouraging US inflation data. Weak loan demand, a heavy fall in imports, and a deflationary reading on the CPI in July were taken as further signs of the Chinese economy faltering from its reopening effort. These dynamics and a still-resilient US economy boosted the dollar. Bond yields ended the week higher, with many highlighting a tepid 30-year US Treasury auction as the catalyst; higher energy prices were likely also a factor on the basis that, if sustained, may complicate the downward path of inflation. 


July's CPI data confirmed the continuation of the disinflationary process playing out in the US, with the Fed likely to extend its pause. For the second month running, both the headline and core rates printed at 0.2% month-on-month, in line with expectations. At annual rates, headlined CPI firmed from 3% to 3.2%, lifting mechanically due to large energy price falls from 12 months ago, and core CPI softened from 4.8% to 4.7%, a 21-month low. 

Importantly, the recent momentum in the monthly readings highlights the easing of price pressures. On a 3-month annualised basis, headline inflation was 1.9% (on track with the Fed's inflation target) and 3.1% for core inflation, these rates well down from 3.3% and 4.3% respectively at the end of last year. 


At this week's parliamentary testimony, RBA Governor Philip Lowe said that while the Board may resume hiking rates, policy was already at a restrictive setting and it was mindful of striking the right balance to meet both sides of its mandate for full employment and 2-3% inflation. After leaving rates on hold at the July and August meetings, the Board was taking time to assess developments, but recent data had indicated that inflation remained on track to return to target, with the economy avoiding a downturn in the process.

The RBA's pause has given households a reprieve from adding to cost-of-living pressures, but it has had a surprisingly limited effect on sentiment. The Westpac-Melbourne Institute Index of consumer sentiment remained at a deeply negative level in August and has improved only modestly since June (2.3%). The NAB Business Survey for June reported confidence among firms is also weak; however, the gauge of business conditions is at a strong level reflecting the ongoing resilience in demand. That said, order books continue to point to an upcoming slowdown with forward orders in decline.


In the UK, an upside surprise on June quarter GDP at a 0.2%q/q expansion sees the economy holding up amid cost-of-living pressures and rising interest rates. Growth over the past year has been weak (0.4%) but ultimately more resilient than many - most notably the Bank of England - had anticipated. While a downturn has been kept at bay, UK GDP has yet to recover to its pre-pandemic level of output 3½ half years on from the eve of the crisis.