Data through the week reaffirmed expectations that central bank tightening cycles are at or near their peaks, while additional measures from the authorities in China contributed to upbeat sentiment. The Australian dollar saw its first weekly rise to the USD in 7 weeks, reflective of the tailwinds that drove equity markets to strong gains. The recent upward pressure on front-end US yields was reversed by an easing in labour market conditions and inflation data that matched expectations.
US data painted a constructive picture of conditions as far as markets were concerned, the mix indicating the consumer continues to underpin economic resilience, alongside an easing of labour market tightness and inflation pressures that suggest the Fed can remain on hold. Personal spending (0.8%m/m/6.4%yr) has outpaced incomes (0.2%m/m/4.6%yr), with elevated savings continuing to support consumption. Declining inflation has also been a factor, reducing the drag on real incomes. Headline (3.3%yr) and core PCE prices (4.2%yr) actually rose modestly in July, but these rates are well down from their 2022 peaks of 7% and 5.4% respectively.
Indications are that the Fed is likely to be content with that progress, particularly with signs of better balance in the labour market. Job openings fell from 9.5 million to 8.8 million in July. Although nonfarm payrolls printed above expectations at 187k in August (vs 170k exp), with -110k of revisions to June and July the 3-month average increase has slowed to around 150k, its lowest since the onset of the pandemic. Softer labour demand saw the unemployment rate lift from 3.5% to 3.8%, though that came alongside a rise in labour force participation to 62.8%, a high back to February 2020. Meanwhile, average hourly earnings at 4.3%yr softened from 4.4%.
Momentum for an ECB hiking pause is building, with signs the Governing Council may be shifting to a more balanced outlook on rates as the latest inflation data broadly met expectations. In light of a deteriorating growth backdrop in the euro area and elevated inflation, the account of the ECB's July meeting revealed that the Governing Council discussed the risk of a "phase of stagflation" emerging as opposed to a "more benign scenario of a soft landing". Printing at 5.3%yr on both a headline and core basis in August (from 5.3% and 5.5% respectively in July), inflation still remains well above the ECB's 2% target. Given that weakening growth will assist in bringing inflation back to 2%, the ECB's Isabel Schnabel reiterated the Governing Council remained in a data-dependent mode, yet to determine if rates are appropriately calibrated at a "sufficiently restrictive" level.
Easing inflation in Australia points to the RBA leaving the cash rate on hold (4.1%) next week, this to be the final meeting led by Governor Philip Lowe. Headline CPI fell from 5.4% in June to 4.9%yr in July - below expectations for 5.2% - with the core measures also softer, the key trimmed mean gauge into 5.6% from 6% previously (reviewed here).
Modest economic growth of around 0.4% is expected to be reported in the June quarter National Accounts next week. My detailed preview (see here) discusses that the main theme remains around the consumer, with household consumption weighed by headwinds from falling real incomes and rising interest rates. But there is an underlying resilience in spending, seen in retail sales lifting by 0.5%m/m in July (see here).
A contributing factor may be the upturn in housing prices, which lifted for the 6th month running in August (0.8%) to nearly reverse their earlier peak-to-trough fall of around 10%. Housing finance has lifted on the back of this, but commitments fell by 1.2% in July (see here). Construction activity (0.4% in Q2) continues to be held back by constraints in the residential sector (see here), and dwelling approvals slid a further 8.1% in July (see here). Despite the broader slowdown, business investment continues to advance, with capex up 2.8%q/q (see here).
