Australian retail sales fall 0.4% in March

Australian retail sales for March were much weaker than expected falling by 0.4% in the month against expectations for a modest rise (0.2%). The weak result was driven by a pullback in discretionary spending (-1.3%) following increases in January (1.8%) and February (0.6%). RBA rate cuts in 2024 were priced out following last week's Q1 inflation data; however, markets are reviewing that assessment following today's report. 

March sales contracted by 0.4% as weakness in discretionary spending (-1.3%) more than offset a sharp rise in food sales (0.9%), its fastest increase since December 2022. Discretionary spending drove retail sales over the summer - with the ABS attributing this to strong support for major events including the Taylor Swift Eras Tour, the Australian Open and the Big Bash League cricket - leading to an inevitable unwind as Autumn arrived. Overall, quarterly sales were soft rising by just 0.2%, likely declining in inflation-adjusted terms (retail volumes are due to be published next week).  

There were broad-based declines across the sub-categories of discretionary spending in March.  Clothing and footwear (-4.3%) and department stores (-1.6%) saw the sharpest declines, largely reversing their increases in February. Spending on household goods (-1.4%) and at cafes and restaurants (-0.2%) also declined. Food sales lifted sharply (0.9%), but that followed declines in January and February.

Overall, today's report came in much weaker than expected and likely puts the prospect of the RBA cutting rates later this year back on the table. Momentum in household spending - particularly in discretionary categories - is weak amid cost-of-living pressures and higher interest rates. Although the quarterly inflation rate ticked up in Q1, this was predominantly driven by areas such as rents, insurance and education costs, rather than reflecting strong demand.  

Macro (Re)view (26/4) | AUD advances on RBA repricing

Global equity sentiment rebounded driving strong weekly gains for indices across the US, Europe and Asia following recent declines. This gave a lift to a range of currencies against the US dollar, including the Australian dollar which posted its strongest week gain to the USD this year, with a hawkish repricing of the RBA rates outlook on the back of stronger-than-expected Q1 CPI data also a factor. Notwithstanding the broader weakness, the USD closed the week through 158 to the Japanese Yen - a new 34-year high - after the Bank of Japan was seen as showing little urgency at this week's meeting to respond to a weaker currency despite this contributing to upward revisions to the domestic inflation outlook. 

Elevated US inflation data on the eve of the next week's Fed meeting has further pushed back expectations for rate cuts this year. The 3 rate cuts signalled by the Committee for 2024 back at the March meeting now compares with market pricing for a single cut late in the year. Although there were some softer signals from a US growth perspective this week: Q1 GDP came in well below estimates slowing to 0.4% quarter-on-quarter (3% year-ended) and the April PMI showed a lacklustre 50.9 reading, there were still signs of an economy with underlying strength. Most notably, much of the weakness in Q1 GDP was attributable to trade and inventories - both volatile components - while domestic demand advanced solidly at 0.7%q/q (2.9%Y/Y), with real household consumption rising at a 0.6%q/q pace (2.4%Y/Y). However, economic resilience is contributing to a continuation of above target inflation; the Fed's preferred core PCE deflator printed at 0.3% month-on-month in March, leaving the annual rate still some way adrift from the 2% target at an unchanged 2.8%. 

Growth in the euro area and UK showed signs of rebounding early in Q2 following lengthy periods of stagnation. April's PMI readings lifted in both economies: euro area 51.4 from 50.3 and UK 54.0 from 52.8, indicating economic growth was expanding at its fastest pace since May last year. The acceleration in activity was driven by the services sector, with new orders expanding and hiring increasing. However, the downside is that robust labour markets appear to be underpinning elevated cost pressures. Meanwhile, the manufacturing sector remains a headwind to growth in both economies; activity in the sector declined for the 13th consecutive month in the euro area and slipped back to a 2-month low in the UK after edging into positive territory in March. The data gave support to the Euro but expectations remain firmly anchored for a June ECB rate cut. In the UK, comments from Bank of England Chief Economist Huw Pill expressed a more cautionary view around cutting rates than outlined by other policymakers (Bailey and Ramsden) last week. 

March quarter inflation in Australia surprised on the upside of expectations, prompting markets to remove the RBA rate cut that was priced in for later in the year. Headline CPI was 1% in the quarter (vs 0.8% forecast), up from 0.6% in Q4, with the annual pace slowing from 4.1% to 3.6%. Price increases in a range of non-discretionary areas including education, health care, rents and insurance drove an uplift in services prices in the quarter (1.4%), the main impulse behind the stronger headline inflation outcome. As a result, the core (trimmed mean) rate also came in strong relative to expectations at 1%q/q and 4%Y/Y, down from 4.2% previously. The RBA's current forecast track - due to be updated at the next meeting in early May - has the core rate declining to 3.6% by the middle of the year and then to 3.1% by year-end. Overall, my view is that the report is unlikely to have major RBA policy implications due to the overall disinflationary process still being intact. The Board has already been notably reluctant to endorse pricing for rate cuts and it has pointed out that, similar to overseas, returning inflation to target is unlikely to be smooth in Australia. For more analysis, please see my review of the CPI report here. 

Australian Q1 CPI 1%, 3.6%Y/Y

Australian inflation was stronger than expected in the March quarter, leading markets to price out expectations for an RBA rate cut this year. Quarterly inflation was 1% in both headline and core terms, increasing in pace from the previous quarter driven by rises in services prices. Annual inflation, however, is still slowing, retracing to the pace seen around late 2021/early 2022.  

Consumer Price Index — Q1 | By the numbers 

• Headline CPI printed at 1% in the March quarter, above the 0.8% figure expected and up from 0.6% in Q4. Headline inflation fell from 4.1% to 3.6% at an annual rate (vs 3.5% expected). 

• Underlying CPI averaged 1% in the first quarter compared to 0.8% in the previous quarter. The annual pace was slightly softer at 4% from 4.2%. 

• The key measure of core inflation, the trimmed mean, came in at 1%q/q (vs 0.8% expected) from 0.8%q/q in the December quarter, with the pace easing from 4.2% to 4% in year-ended terms.  

Consumer Price Index — Q1 | The details 

Australian inflation came in firm relative to expectations in the March quarter, though annual inflation continued to slow. Headline CPI was 1% in the latest quarter, up from 0.6% in Q4, with the annual pace slowing from 4.1% to 3.6%, its lowest since the end of 2021. The uptick in quarterly inflation came as services prices (1.4%q/q) saw their strongest rise in a year (4.3%Y/Y); meanwhile, goods prices (0.5%q/q) saw only a moderate increase, cooling from 3.8% to 3.1% year-ended. 

The faster pace of services inflation in Q1 was driven by large price rises for education (5.9%) - its strongest increase in 12 years - and health services (2.2%). Meanwhile, rents (2.1%) continued to rise at pace with vacancy rates across Australia very low. The ABS reported that rents are up 7.8% through the year, rising at their fastest since 2009, but excluding the effect of a Federal Government rebate scheme, the increase would have been even larger (9.5%). 

Prices are rising broadly across the services basket, up on average by 4.9% over the past year. There is, however, one notable exception: holiday travel prices fell 6% in the quarter on reduced demand following the peak summer period, to be down 1.1% over the year on declines for domestic (4.7%) and international travel (-1.1%). 

Disinflation in the goods category remains intact, though the speed continues to be slower in Australia than in other advanced economies. The goods that pushed up most on headline inflation in the March quarter were: new dwellings (1.1%), vegetables (6.9%) and pharmaceutical products (7.1%). At the other end of the scale, furniture prices fell sharply (-5.6%); government rebates drove declines in electricity prices (-1.7%); and fuel prices weakened (-1%).   

Consumer Price Index — Q1 | Insights 

The March quarter inflation outcomes were firmer than markets had expected but were closer to the RBA's forecasts from the February Statement on Monetary Policy, coming in slightly below on headline (3.6%Y/Y vs 3.7%Y/Y) and above on core (4%Y/Y vs 3.9%Y/Y). Overall, I don't think the report will have major implications from a policy perspective. Markets have moved to price out the one remaining RBA rate cut they had factored in for 2024, but the Board, in any case, had been very reluctant to endorse those expectations for easing at their meetings so far this year. Australian inflation is moving down from the peaks of late 2022, but as seen overseas (and now here), that can be a bumpy path. The focus of the Board will remain on the composition of inflation pressures between stickiness domestically (non-tradables 5%Y/Y) and the easing in price pressures from global factors (tradables 0.9%Y/Y). A higher-for-longer approach is the more likely course than any further rate hikes from the Board. 

Preview: Q1 CPI

Australia's March quarter inflation report is set to be published at 11:30am (AEST) today. After slowing to a 2-year low at the end of 2023, inflation is expected to have eased further through the first quarter to 3.5% year-on-year in headline terms and 3.9%Y/Y on a core basis. Material progress has been made in returning inflation towards the RBA's 2-3% target band; however, the Board only recently signalled the peak for interest rates and it has remained reluctant to discuss a timeline for easing policy. This, together with the significant reduction in rate cut expectations in the US, has seen markets reprice their 2024 profile for RBA easing to just one rate cut from the 2-3 anticipated at the start of the year.   

A recap: Inflation slowed sharply into year-end 

Key inflation outcomes surprised on the downside of estimates in the December quarter. Headline CPI was 0.6% in the quarter and 4.1% in annual terms, a 2-year low after declining from 5.4%. Core inflation as measured by the trimmed mean printed at 0.8% quarter-on-quarter, resulting in the annual rate retracing from 5.1% to 4.2%, its lowest since Q1 2022.   

The decline in Australian inflation from its late 2022 peak has largely been driven by the easing of global shocks - namely the Covid pandemic and its associated supply disruptions and the war in Ukraine - that drove up goods and energy prices. These dynamics continued to filter through to Australia in the December quarter, while Black Friday discounting also contributed to slower inflation. 

By contrast, inflationary pressures generated domestically - although easing - have remained more persistent. This is reflected in the elevated rate of inflation for services, which has been underpinned by components such as rents, insurance, household services and education. 

Further progress is expected in the March quarter 

Quarterly CPI is expected to print at 0.8% in headline terms, an outcome that would slow the annual pace from 4.1% to 3.5%. Trimmed mean CPI is forecast at 0.9% quarter-on-quarter, with the annual rate easing from 4.2% to 3.9%. The expected figure for headline inflation (3.5%Y/Y) is slightly below the RBA's forecast track (3.7%Y/Y) but the central bank's projection for core inflation (3.9%Y/Y) is line with the market. 

As a guide, the 3-month change in the monthly CPI indicator often provides a reliable lead estimate for the quarterly inflation rate. For the 3 months to February, headline CPI was 0.5%, suggesting that, on this basis, there could be downside risks to the market forecasts.

However, markets are more wary about an upside surprise today. This is seemingly taking into account developments overseas where inflationary pressures have remained sticky in early 2024, most notably in the US. On the domestic front, government rebates on energy bills and rents have provided support for households, but there is uncertainty around what their relative effects will be in the March quarter and these are key unknowns heading into today's report. My forecast is for a 0.7% quarterly CPI figure (3.3%Y/Y) and 0.8% for the trimmed mean (3.8%Y/Y).  

Macro (Re)view (19/4) | Sentiment falters

US equities saw sizeable declines this week as risk sentiment was hit by the conflict in the Middle East and by a further rise in Treasury yields to new year-to-date highs as Fed Chair Powell signalled a higher-for-longer stance on rates. The S&P 500 saw its largest weekly fall since March last year while the Nasdaq was down by its most since November 2022. US exceptionalism underpinned an uplift in the IMF's forecast for global growth (3.2%) this year and remains a key driver behind US dollar strength. Q1 growth in China was above expectations at 1.6% (5.3%Y/Y), but the IMF highlighted downside risks from the downturn in the property market.   

A shift in tone from Fed Chair Powell effectively validates markets repricing to a delayed start to the easing cycle in the US. Commenting on last week's stronger-than-expected CPI report for March, Chair Powell said that it was likely that it would now take longer for the policy-making FOMC to garner the confidence that inflation is headed back to the 2% target on a sustainable basis. While waiting for more progress on inflation, the current level of rates could be maintained "for as long as needed". Although the Fed's Beige Book (April) reported a slowing in growth and highlighted a weakening in discretionary spending, retail sales data for March came in well above estimates up 0.7% on a headline basis (vs 0.4%) and 1.1% in the control group (vs 0.4%).    

Market pricing for rate cuts in the UK was scaled back in the face of stronger-than-expected wage and inflation data; however, comments from BoE Governor Bailey largely restored expectations for 2 cuts this year. Although inflation continued to decline in March: headline CPI easing from 3.4% to 3.2% and the core rate softening from 4.5% to 4.2%, these latest outcomes came in firm relative to expectations. Meanwhile, services inflation - the component of the CPI basket being watched closely by the BoE - showed minimal progress at 6%yr from 6.1% previously. The persistence of services inflation coupled with earnings growth in February's labour market data slowing less than expected to an annualised pace of 6% (from 6.1%) sparked a hawkish repricing of BoE rate cut expectations, with the first cut pushed back to November. This was then reassessed as BoE Governor Bailey spoke in Washington highlighting that inflation was still "on track" to decline as expected and that the dynamics of price pressures were different to the US where demand was stronger. Later in the week, the BoE's Ramsden said that risks to the persistence of domestic inflationary pressures were easing.   

Euro area inflation estimates for March were finalised at 2.4%yr in headline terms (from 2.6% in February) and 2.9%yr on core (from 3.1%). ECB rates are likely to be cut in June and many officials from the central bank reiterated that message this week. However, the ability for ECB to diverge from Fed policy remains a key discussion point; Austria's central bank governor Holzmann said that, in his view, 3-4 ECB cuts this year was an unlikely scenario if the Fed did not ease policy.    

More volatility was seen in the latest Labour Force Survey in Australia. In March, employment fell by a net 6.6k, a downside surprise on estimates for a modest rise (7k) following February's seasonally-related surge in hiring (117.6k). This resulted in the unemployment rate lifting from 3.7% to 3.8%, though a larger increase may have been kept at bay due to the participation rate easing from 66.7% to 66.6%. Despite the weakness in March, underlying momentum in employment is solid rising by 122.3k through Q1 - its largest quarterly rise in a year - for an average increase of 40.8k per month. Overall, the solid momentum in employment together with a continuation of low unemployment indicates that the domestic labour market remained resilient through the early part of the year to a slowing growth backdrop. My full review of the March Labour Force Survey can be accessed here.

Australian employment -6.6k in March; unemployment rate 3.8%

Australian employment surprised expectations falling modestly in March (-6.6k), lifting the unemployment rate from 3.7% to 3.8%. Overall, however, the unemployment rate remains low and employment lifted strongly in the March quarter, indicating that the resilience in the labour market continued as growth remained subdued in early 2024.  

By the numbers | March  

• Employment fell by a net 6.6k in March, missing expectations for a rise of around 7k following the surge seen in February (117.6k). Backward revisions subtracted 3k from employment over January and February. 
• The unemployment rate rose by less than expected printing at 3.8% (vs 3.9% forecast) from 3.7% in February. A decline in the underemployment rate from 6.6% to 6.5% held total underutilisation at 10.3%.  

• A seasonal boost to the labour supply in February did not continue in March as the participation rate fell back to 66.6% from 66.7%. 

• Hours worked rose by 0.9% month-on-month, increasing by 1.7% over the year. 

The details | March  

A modest 6.6k net fall in employment (full time +27.9k and part time -34.5k) in March saw the unemployment rate reverse some of its sharp decline in the prior month, lifting from 3.7% to 3.8%. This completed a sequence of volatile employment outcomes in the opening quarter of the year: January 11.2k, February 117.6k and March -6.6k, reflecting shifts in hiring patterns in the post-pandemic labour market. Market expectations were for a small rise in employment (7.2k) and my view was that there were upside risks to that figure. In the event, however, these expectations fell on the wrong side of the volatility. Nonetheless, the more important point is that the underlying pace of employment remains solid. Overall in Q1, employment lifted by 122.3k - its strongest quarterly increase in a year - averaging a robust gain of 40.8k per month.   

After falling to a 5-month low in February (3.7%), the weak employment outcome in March saw the unemployment rate ticking back up to 3.8%. This increase, however, was moderated by a decline in the participation rate from 66.7% to 66.6%, remaining just below the late 2023 record high (67%). Despite unemployment rising, the broader underemployment rate (combining unemployed workers and those employed but wanting additional hours) fell from 6.6% to 6.5%, its lowest since last October. Around these offsetting movements in the unemployment and underemployment rates, the total labour underutilisation rate remained at 10.3%, down slightly on the levels seen either side of the turn of the year. 

Hours worked were reported to have lifted by 0.9% in the month, with gains coming through across both the full time (1%) and part time segments (0.5%). As with the employment outcomes, changes in hours worked were volatile month-to-month in Q1: January -1.9%, February 2.9% and March 0.9%. On a quarterly basis, hours worked were flat; however, that was an improvement the 0.5% fall in the final quarter of last year. 

In summary | March 

March's report contained more volatility but the underlying theme is that the Australian labour market remains in robust shape. Conditions have eased from peak levels of tightness, but that is in the context of a notable slowdown in economic growth through 2023. Momentum in employment remains solid and indicators of labour demand suggest that hiring will continue. There looks to be little in today's report that would prompt the RBA to reassess its view on the labour market. 

Preview: Labour Force Survey — March

Australia's Labour Force Survey for March is due at 11:30 (AEST) today. A seasonal rebound in employment drove the unemployment rate back below 4% in February, but markets expect some reversal in today's report. There are upside risks to expectations for a modest employment outcome in March. 

A recap: Seasonal rebound in employment drove unemployment back below 4% 

Employment surged by a seasonally adjusted 116.5k in February, a rebound that far exceeded expectations (40k) following a decline of 46.5k over December and January (revised from -62.2k). Shifts in hiring patterns in the post-pandemic labour market led to elevated volatility in employment outcomes over the summer months, with many more people now moving into employment after the peak holiday period than has historically been the case. Smoothing the volatility, employment gains averaged around 23k for the 3 months to February, a relatively subdued pace in line with the slowing economy. 

Labour market tightness eased through 2023; however, this trend was halted by the strength of February's employment outcome. The national unemployment rate fell to a 5-month low at 3.7% from 4.1% in January, even as labour supply increased with the participation rate lifting from 66.6% to 66.7%. With the broader underemployment rate declining from 6.7% to 6.6%, this left total labour force underutilisation sharply lower on the prior month at 10.3% from 10.8%. 

Reflecting the rebound in labour market activity, hours worked advanced by 2.8% in February, the largest month-on-month increase in 12 months. This followed a sequence of weak outcomes in which hours worked fell in each of the 3 preceding months: November -0.2%, December -0.5% and January -2.0%.   

Labour market activity is expected to moderate in March 

The strength seen in the February survey is not expected to extend to today's report. The median estimate is for a modest rise in employment of around 7k, though estimates vary widely between -40k and +30k. The high-frequency ABS payrolls series recorded a 0.4% rise over the month to mid-March, indicating there could be upside risk to the median forecast. Reflecting upon recent history, March employment has come in sharply higher than consensus in 2 of the past 3 years. 

Based on the expectation for employment to moderate, the market forecast is for the unemployment rate to lift to 3.9% in March. Again, estimates cover a wide range from 3.7% on the low side to 4.2% on the high side. Should employment outperform consensus, then the unemployment rate may remain unchanged or come in lower than expected, albeit conditional upon the movement in the participation rate.  

Macro (Re)view (12/4) | US CPI prompts Fed rethink

March inflation data in the US came in above expectations this week, sparking a repricing of the profile for policy easing from the Fed this year. A June rate cut is effectively off the table, leaving markets anticipating only 2 rate cuts at most to be delivered by the Fed over the back half of the year. With the ECB and Bank of Canada signalling that policy easing is on the cards, this has set up a divergence with the Fed, which has sent US yields to fresh year-to-date highs and boosted the US dollar.

The pick-up in US inflation has extended to March as both headline and core CPI surprised on the upside of expectations at 0.4% month-on-month. Headline CPI lifted from 3.2% to 3.5%yr while the core rate was unchanged at 3.8%, but it is the recent momentum that has prompted a repricing of the Fed outlook, with later and fewer rate cuts now expected. Through the first 3 months of the year, headline CPI ran at a 4.6% annualised pace rising from 1.9% at the end of 2023, while core CPI moved up from 3.3% to 4.5% annualised. 

Although Fed officials have thought seasonality has played a role in this acceleration, a more cautious tone on policy easing from the Fed may be forthcoming - comments from FOMC members Williams and Collins have indicated less urgency to cut - as the services basket (5.3%yr) has been a key contributor. That said, the most relevant inflation gauge for the FOMC is the core PCE deflator, which is running notably below the CPI outcomes. Taking into account the March readings for producer prices at 0.2%m/m and 2.4%yr, markets are estimating core PCE to come in around 0.3%m/m and 2.7%yr when the data prints on 26 April.   

All remains on track for the ECB to start cutting rates in June. ECB policymakers left rates unchanged this week but a new addition to the statement noted that "it would be appropriate to reduce the current level of monetary policy restriction" if the upcoming set of ECB inflation forecasts, wage-price dynamics, and evidence of policy transmission provide increased confidence in a return to sustainable 2% inflation. All that will be needed to give the Governing Council that increased confidence should be available by the June meeting. An unusually candid insight from ECB President Lagarde in the post-meeting press conference revealed that "a few members" had already come to the view that it was time to cut and this forms a base of support to which the consensus is expected to cross to. 

President Lagarde was reluctant to discuss policy beyond June; however, a Reuters article referencing ECB sources suggested that the easing cycle will proceed cautiously - potentially with a pause at the July meeting - with this week's US CPI data indicating inflationary risks remain. The ECB continues to see upside risks to inflation from the impact of geopolitical tensions on energy and goods prices, as well as domestic factors associated with the strong labour market and profit margins. Keeping rates at restrictive levels lessens these upside risks but with an increasing trade-off with the ECB describing growth as weak and with risks to the outlook "tilted to the downside".   

Survey data in Australia this week remained consistent with economic activity holding up amid weak confidence. Consumer sentiment according to Westpac-Melbourne Institute Index fell more than 2% in April (82.4), with the index little changed over the past couple of years at very pessimistic levels. Notably, however, assessments on the labour market remain upbeat. The NAB Business Survey reported a continuation of below-average confidence among firms in March (+1) but with business conditions remaining robust (+9), supported by strength in trading conditions. In other news, housing finance commitments lifted by 1.5% in February, rebounding from a 3.4% decline over December and January (reviewed here). 

Australian housing finance rebounds 1.5% in February

Australian housing finance commitments increased by 1.5% in February to $26.4bn, rebounding from a 3.4% decline through December and January. Commitments rose to all major segments but remain near cycle lows in the construction-related area. 

February's 1.5% lift in commitments came in slightly weaker than expected (2%); however, backward revisions in today's release significantly reduced the decline in lending (likely seasonally related) over December and January from -7.9% to -3.4%. At $26.4bn, commitments stand 14.5% above their cycle low reached in January 2023 ($23.1bn). 

Lending to the owner-occupier segment was up 1.6% for the month ($16.9bn), with the underlying volume of loans written advancing in most categories. Upgraders saw a 1.7% rise in commitments ($13bn) on a 0.4% lift in loan volumes (21.1k). First home buyer activity lifted, reflected in increased lending (+4.8% to $4.9bn) and loan demand (+4.3% to 9.4k). 

Construction-related lending lifted a modest 0.6% and loan volumes rose 3.6%; however, their respective levels at $2.6bn and 4.3k remain near their lows for the cycle, with higher interest rates, capacity pressures and weak sentiment all contributing factors. 

Turning to the investor segment, commitments rose by 1.2% to $9.5bn, broadly reversing a 1.3% fall over December and January. Lending has increased significantly over the past year (21.5%yr), with very tight rental markets putting upward pressure on rents, an attractive backdrop for investors.  

Refinancing (3%) saw its first rise since July but at $16.5bn the level is down sharply on a year ago (-17.9%). The peak for refinancing came in mid-2023, as many mortgages on fixed rates rolled on to higher variable rates.  

Macro (Re)view (5/4) | US yields lift to 2024 highs

US bond yields traded to the top end of their ranges for the year as data on the labour market came in strong and Fed officials continued to communicate they are in no rush to cut rates. In this context, it was surprising that the US dollar lost ground to several majors this week. Equities were soft to start the new quarter, though this follows strong gains through Q1. Highlights next week include US CPI and the FOMC meeting minutes (Wed) as well as policy meetings at the ECB (Thu), Bank of Canada (Wed) and Reserve Bank of New Zealand (Wed). 

Friday's US employment report has validated the message of patience coming from Fed officials, reiterated Chair Powell this week. Nonfarm payrolls surged by 303k in March, the strongest one-month increase since last May and well clear of the 214k rise expected, while backward revisions boosted payrolls by a net 22k over January and February. As a result, the 3-month average increase for payrolls lifted to 276k, its highest level in a year. Moreover, the unemployment rate fell back to 3.8% from 3.9% previously, the 26th consecutive month below 4%. But perhaps the most influential aspect of the report was that these outcomes came alongside a slowing in average hourly earnings growth from 4.3% to 4.1%yr, indicating that the strong labour market is not leading to upward pressure on wages. A rising labour supply is likely to be playing a role here, with the participation rate rising from 62.5% to 62.7%; the key prime-age participation rate eased from 83.5% to 83.4% but remains around its highest levels in 15 years.       

An encouraging inflation print is unlikely to change the outcome of next week's ECB meeting, with expectations firmly anchored on a June start to the easing cycle in the euro area. Downside surprises in March saw headline inflation fall from 2.6% to 2.4% (vs 2.5% exp) while the core rate came in from 3.1% to 2.9% (vs 3% exp), a 25-month low. With rates at restrictive levels and inflation within touching distance of the ECB's 2% target, a strong case could be made for a rate cut next week. But the account of the March meeting made clear that the Governing Council is taking a more cautious approach as it waits for more data before giving the green light to easing policy. It was highlighted that by the June meeting, the Governing Council will have before it a new set of forecasts and "significantly more data", including on wage dynamics, whereas the information on hand at next week's meeting will be "much more limited" and thus making harder for it to be sufficiently confident that inflation will return durably to target.  

The March RBA meeting minutes reflected the Board's tilt to a more neutral messaging on policy. For the third meeting in succession, the Board left the cash rate on hold at 4.35%; however, on this occasion, there was no mention of a hike being considered. Up to this point, the minutes from every meeting since the tightening cycle commenced in Australia in May 2022 have explicitly stated that the Board has considered hiking rates. Although it has taken the RBA longer to arrive here, it is now effectively on the same page as many of its peers in signalling that rates have peaked, with the focus turning to how long restrictive monetary policy will be maintained. 

A key judgment from the Board was that the balance of risks to the economy has "become a little more even", indicating a more cautious approach to policy going forward. On the one hand, the goal of returning inflation to target within a reasonable timeframe is not yet assured, but on the other, the Board highlighted that it is also important to preserve the gains made in the labour market. Also of note out of the meeting was the Board's intention to transition from a post-pandemic state of excess system reserves to an 'ample reserves' regime. The RBA's Assistant Governor Kent expanded upon this decision in a speech, highlighting 'ample reserves' as the most efficient approach to implementing monetary policy. Local data updates this week included a 1.9% fall in dwelling approvals in February (see here) and a narrowing in the monthly trade surplus to $7.3bn (see here). 

Australia's trade surplus retraces to $7.3bn in February

Australia's goods trade surplus retraced from $10.1bn to $7.3bn in February (vs $10.8bn expected), its lowest level since last September. Exports declined in the month (-2.2%) as iron ore prices pulled back, while imports advanced (4.8%) on strength in intermediate and consumption goods.   

The trade surplus fell by $2.8bn in February printing at $7.3bn, a 5-month low as exports weakened and imports lifted - a reversal of the recent trend. With backward revisions lowering the surpluses earlier reported for January ($10.1bn from $11bn) and December ($9.9bn from $10.7bn), the surplus averaged $9.1bn for the 3 months through February - a pullback from a rising trend through late 2023/early 2024. 

Exports declined by 2.2% in February, their largest fall in 5 months, to come in at $45.5bn (-6.4%yr). This weakness was driven largely by falling iron ore prices, leading the value of iron ore exports to decline by 8.4% in the month to $14.6bn. However, the value of coal (9.6%) and LNG exports (4.1%) increased, leaving non-rural goods broadly steady on the month ($37.2bn). Non-monetary gold (-21.9%) and rural goods (-4.5%) also weighed on exports, the latter falling on declines in cereal (-21.1%) and meat exports (-7.4%).   

Import spending increased by 4.8% to $38.2bn in February, a rise of 11.8% over the year. This was the strongest lift in imports since the 7.8% rise in September. The largest contribution to higher imports came from intermediate goods, the category rising at its fastest pace since May 2022 (9.4%) and touching its highest level back to November 2022, as processed industrial supplies surged (15.9%). Consumption goods posted a 2.8% rise, despite weaker vehicle imports this month (-8.6%). Meanwhile, the value of capital goods imports fell modestly (-0.7%m/m).