US inflation data this week snapped its recent run of upside surprises and underpinned a positive tone for risk. Equity markets in the US advanced to new highs buoyed by the prospect of rate cuts from the Fed later this year, giving bearish momentum to the dollar. Amid that backdrop, the Australian dollar has rallied to its highest levels since January, outweighing renewed pricing for an RBA rate cut in 2024 on the back of this week's labour market and wages data.
US data this week was seen as endorsing the Fed's dovish messaging at its recent FOMC meeting. Following the softer-than-expected increase of 175k in April's nonfarm payrolls report, signs of softening momentum in economic growth were taken from this week's inflation and retail sales data for April. Both headline and core inflation printed at 0.3% month-on-month (vs 0.4% headline and 0.3% core), as headline eased from 3.5% to 3.4%yr and core moved down to a 3-year low of 3.6% from 3.8%. These outcomes - while still too hot to appease the Fed - were interpreted favourbly in the context of the inflation data having come in above expectations through the early part of the year. Furthermore, markets were encouraged by better underlying detail: services inflation (0.4%m/m) posted its slowest rise so far this year - though the annual rate saw an uptick from 5.2% to 5.3% - as disinflation continued in goods prices at 0.3%yr from 0.6% previously. Signs of softer consumer demand were taken from retail sales growth stalling in April (vs 0.4%) as the key control group - viewed as a better gauge of underlying spending - was unexpectedly weak declining by 0.3%m/m (vs 0.1%).
In Europe, several ECB officials continued to reaffirm a June rate cut is firmly on the cards. Beyond June, markets are pricing the ECB to cut on a quarterly profile, resulting in a total of 3 rate cuts by year-end. Inflation data for April was finalised at 2.4%yr on a headline basis with the core rate slightly firmer at 2.7%yr; unlike the US, disinflation in the euro area has continued steadily so far this year - headline falling from 2.9% last December and core slowing from 3.4%. New forecasts published by the European Commission this week lowered its inflation outlook, anticipating an earlier return to the ECB's 2% target in 2025. Meanwhile, consistent with signs that GDP growth has started to pick up expanding by 0.3% in Q1, the Commission has retained its outlook for growth in 2024 to firm to 0.8% before strengthening to 1.4% in 2025.
Australia's labour market data released this week tipped the profile for RBA rates pricing towards a cut as the next move, outweighing the impact of measures announced in the Federal Budget. My budget analysis focused on the competing pressures on the nation's finances. Revenue windfalls have swung the budget into surplus, giving the government headroom to provide cost-of-living support (built around personal tax cuts and energy bill relief) in the near term. But larger deficits are forecast in coming years, driven by the escalating cost of the delivery of key services. The budget measures have mainly been assessed through an inflationary lens, contributing a net $9.5bn of stimulus in 2024/25 at a time when the RBA doesn't see inflation back at target until mid-2026. However, the RBA's forecasts are yet to take full account of the situation.
Employment rebounded from a decline in March to rise by a stronger-than-expected 38.5k in April, with the 3-month average (50.2k) reaching its strongest level since May last year. However, an uplift in the participation rate (66.7% from 66.6%) saw the unemployment rate increase to 4.1% from a revised 3.9%. My review of the report here concludes that the labour market remains robust but continues to rebalance from peak levels of tightness. Consistent with this situation, wages growth printed on the soft side of expectations in Q1 at 0.8%, with a softening in the year-end pace to 4.1% from 4.2% suggesting the peak may be in (reviewed here).