Macro (Re)view (28/6) | Closing out Q2

A messy tape across markets this week factored in encouraging US inflation data, uncertainty going into the weekend's French elections and month- and quarter-end flows. Domestically, inflation data has revamped RBA hike pricing. Reflecting upon the first half of the year, the key theme that stands out is the reappraisal of the Fed easing cycle. The US 2-year yield climbed 50bps as rate cuts were priced out and the timing of the first cut was pushed back well into the second half of the year. This saw the US dollar surge against the yen but weaken against other majors. US equities still rallied strongly and Japan gained 18%. 

Inflation trending in the wrong direction in Australia has upped hawkish bets on the RBA resuming its tightening cycle. Pricing for an August hike lifted to around a 50/50 prospect from just a 10% chance last week after the May CPI release reported a third consecutive rise in the 12-month headline inflation rate to 4% (prior 3.6%, consensus 3.8%). Additionally, an increase in services inflation (4.8%yr) underpinned firmer readings for the underlying CPI measures, with the trimmed mean rising from 4.1% to 4.4%yr. Comments from RBA officials during the week were generally consistent with the theme of the Board's reluctance to tighten further. Assistant Governor Kent - speaking before the CPI release - noted that financial conditions in Australia are restrictive, putting downward pressure on inflation by slowing aggregate demand. On Thursday evening (post CPI) Deputy Governor Hauser during Q&A following his maiden speech cautioned against overreacting to the partial reading of inflation provided in the May report, highlighting the comprehensive quarterly data set for Q2 CPI (due 31 July) as the one to watch. 

As discussed in my CPI review (see here), the situation is more nuanced than concluding Australia is facing a greater inflation challenge than in peer economies. Services inflation in Australia is no higher than overseas; the main difference is that goods prices have not seen anywhere near the same extent of disinflation. Something also to factor in is the effect of upcoming energy rebates that will lower the measured inflation rate. That said, those rebates and other measures, including the stage 3 tax cuts that come into effect next week, could boost demand and slow the disinflationary process. There is a lot for the RBA to consider at its August forecast round and still a range of key inputs to come before then, all with the potential to shift rates pricing. 

Switching to the US where the May personal spending and income data was this week's key risk event. Inflationary pressures eased in line with expectations, the headline PCE deflator softened from 2.7% to 2.6%yr and the core PCE deflator - the Fed's preferred gauge - slowed from 2.8% to 2.6%yr, a low back to March 2021. The monthly changes - 0% headline and 0.1% core - were soft readings that if sustained will open the door to Fed easing, potentially in September. In support of that scenario, the consumption data continued to show signs of slowing household demand. Real spending was up 0.3%m/m (2.4%yr) to be tracking at just a 0.3% pace through the first 5 months of 2024, well down from a robust 1.8% over the back half of 2023.  

The Bank of England's Financial Stability Report noted that the global adjustment to higher interest rates was not yet complete and markets, priced for soft landings, remain vulnerable to a scenario where that does not eventuate. Key risks relate to weaker economic growth, stickier inflation dynamics and geopolitical tensions. In Europe, inflation readings eased in Spain (3.8% to 3.5%yr) and France (2.6% to 2.5%yr), indicating that next week's report for the euro area is likely to show an easing in inflation (2.5% expected) after increasing in May (2.6%). Meanwhile, the ECB's latest measure of consumer inflation expectations reported declines to 2.8% (from 2.9%) and 2.3% (from 2.4%) on a one-year and three-year horizon respectively. 

Australian CPI 4% in May

Australia's 12-month headline CPI inflation rate lifted to 4% in May from 3.6% previously, surprising to the upside of the 3.8% consensus forecast. This was the third month in succession that the headline CPI increased - rising from 3.4% to 4% over the period - with today's print revamping pricing for another RBA hike to a near 50/50 prospect at the next meeting in August. The 3-year government bond yield closed on the highs for the session at 4.12% after going into the report at just above 3.9%. The next CPI update is the full quarterly release for Q2 (due 31 July) and this is what will ultimately hold sway with the RBA in August.  

Base effects pushed up the 12-month headline CPI from 3.6% in April to 4% in May. Today's report actually showed prices in May fell by 0.1% month-on-month, but with a larger decline of 0.4% in May 2023 rolling out of the annual calculation, headline inflation moved higher and by more than expected. The underlying measures were mostly firmer in May: trimmed mean up from 4.1% to 4.4% and CPI ex-volatile items rising from 3.5% to 3.7%, though CPI ex-volatiles and holiday travel softened from 4.2% to 4.1%. 

The key aspect of today's report was the breakdown between services and goods inflation. An unwelcome rise saw services inflation lifting from 4% to 4.8%yr, backing up to its highest since last October. The key contributor was housing pushing up from 4.9% to 5.2%yr, with rents running at an elevated pace (7.4%yr) amid very low vacancy rates across the capital cities. Meanwhile, goods inflation held steady at a 3.3%yr pace. 

In a global context, services inflation in Australia is lower than in the likes of the US (5.2%) and the UK (5.7%); however, goods inflation domestically is significantly higher than in those and many other countries abroad. This is the main factor that sets inflation in Australia apart. 

Turning to some of the key categories, electricity prices lifted from 4.2% to 6.5%yr with the effect of earlier energy bill rebates fading (however new rebates have since been announced and will push down on inflation); holiday travel swung from -6.2% to 2.9%yr; and fuel prices firmed from 7.4% to 9.3%yr. There was some welcome news today, with food prices slowing from 3.8% to 3.3% - a low since early 2022. Insurance prices continued to run at a very elevated pace (14%), though this was at least down from the prior month (16.5%). 

Macro (Re)view (21/6) | RBA holds the line

A dovish hold from the Bank of England and a 50/50 meeting that went the way of a rate cut from the Swiss National Bank combined with political headwinds and softer PMI readings in Europe to give support to the US dollar this week. Japanese inflation data that came in below expectations pointed to caution from the BoJ on monetary tightening, weakening the Yen to near the 160 level. The RBA's decision to hold rates was seen as hawkish, reflected in a firmer Australian dollar and higher bond yields. 

Starting in Australia, commentary locally has centred on the more hawkish elements from this week's RBA meeting. The Board kept the cash rate unchanged at 4.35% but considered the case for a hike, while Governor Bollock said at the post-meeting press conference that the path to a soft landing was narrowing. My note reviewing the meeting offers a different perspective highlighting that little has changed in the data to shift the RBA towards another hike. The Board assesses that policy is restrictive and it is seeing signs of this in inflation and the labour market. Like its peers overseas, the RBA is cautious about how the economy will evolve and is therefore taking a data-dependent approach. By extension, it has retained the guidance that it is 'not ruling anything in or out'. CPI data for May due next week (3.8% expected) will provide a steer on how inflation is progressing through Q2.  

Despite some softening in the data flow, signals on US growth remain solid for now. The Atlanta Fed's GDPNow indicator has growth running at a 3% annual pace, while the preliminary PMI readings for June remained in expansionary territory and came in stronger than expected. The headline reading of activity printed at 54.6, a 26-month high for output growth, driven by an uptick in the services sector (55.1). By contrast, data on consumer spending disappointed expectations this week. May sales were weaker than expected at 0.1%m/m and 0.4%m/m for the control group, and April's estimates were downwardly revised to -0.2% and -0.5% respectively. 

The August Bank of England (BoE) meeting looks live for a rate cut following this week's developments. May's CPI data reported declines in headline and core inflation to lows since mid-late 2021, while there were signs from the BoE's Monetary Policy Committee (MPC) that it is moving closer to easing policy. Headline CPI fell from 2.3% to 2%yr, matching the BoE's target for the first time in around 3 years, and the core rate eased from 3.9% to 3.5%. These outcomes compare to headline CPI at 4% and the core CPI at 5.1% at the end of 2023, highlighting that the UK, unlike some other countries, has seen the disinflationary process continue at pace through the early part of 2024. Food, energy and household goods have all been key drivers of the decline in inflation, but services prices, though easing from 5.9% to 5.7%yr, remain elevated. 

Although there was no change in the voting pattern (7-2) from the previous meeting by the MPC to leave Bank Rate on hold at 5.25%, more members appear closer to supporting a cut. This was outlined in the meeting minutes that noted some members saw this week's call as a 'finely balanced' decision, referencing less concern around services inflation and wage pressures. The two members (Dhingra and Ramsden) already voting to cut assess that easing policy is appropriate given the disinflationary trends and a subdued growth outlook. Market pricing leans towards a rate cut being announced in August, discounting a total of 50bps of easing by year-end.

RBA holds in June

For the 5th meeting in succession, the RBA Board left interest rates on hold; the cash rate remaining at 4.35% and the Exchange Settlement Rate at 4.25%. Markets formed a modestly hawkish interpretation from today's statement and Governor Bullock's press conference; however, not much appears to have changed since the May meeting. The RBA, like its peers overseas, is in data-dependent mode reluctant to give many clear signals on the policy outlook.  

Following today's meeting, the 3-year Australian government bond yield lifted by around 6bps (3.86%) and the Australian dollar traded firmer, with much of the commentary focusing on the hawkish aspects of Governor Bullock's remarks - notably that a rate hike was considered. However, that should not be surprising as the Board has discussed hiking rates at every meeting except one since the tightening cycle commenced in May 2022. Given markets rarely hear from the RBA in between meetings, there can be a danger of over-analysing what occurs on decision day. I think today falls into that category. 

As reiterated today, tighter monetary policy is working. The reality is that over the past 12 months, the quarterly CPI has fallen from 7%Y/Y to 3.6%Y/Y; unemployment is around 1/2ppt higher (4% in May); and GDP growth has slowed from 2.3%Y/Y to 1.1%Y/Y. The RBA, mindful of the lags associated with policy tightening, has raised rates only once over this period, by 25bps last November. The broader strategy of aiming to avoid a recession by gradually returning inflation to target was reaffirmed as recently at the May meeting and revisited today. Clearly, the Board is cautious about how the economy and inflation will evolve, retaining the guidance that it is 'not ruling anything in or out' from a policy perspective. The hawkish interpretation is that this does not preclude another hike, but the dovish reading is that a cut is possible as the next move. 

Looking into today's statement, there were some interesting additions. The Board assessed that the disinflationary process slowed through the early part of the year; however, as discussed in my preview, this has not caused the RBA to revise its inflation outlook. Governor Bullock said that a fuller assessment of the situation will require the Q2 CPI report, not due until 31 July. The Board expects that the recent cost-of-living measures announced by the Federal and state governments will lower headline inflation temporarily, but they could also strengthen demand.

Reflecting upon the Q1 National Accounts, the Board said that 'momentum in economic activity is weak'; however, it noted the upward revisions to household consumption growth, implying a more resilient household sector. Governor Bullock said those revisions had resolved some question marks the RBA had over the weakness earlier reported. That said, the governor also noted the saving ratio had been revised lower, possibly explained by households needing to spend more to cover the necessities. The consumption outlook is supported by the expectation that real incomes will continue to rise; the stage 3 tax cuts; and by wealth effects from the rise in housing prices. On the other hand, consumption could fail to pick up as expected and a deterioration in the labour market would be a major headwind.  

All in all, the RBA will return to watching the data, with its forecasts due to be updated for the next meeting on August 5-6.  

Preview: RBA June Meeting

The RBA Board is widely expected to leave its key interest rate unchanged (4.35%) at today's meeting (decision due 2:30pm AEST). While inflation remains elevated to the 2-3% target, the Board sees increasing signs of the effect of its monetary tightening in slowing growth and in the labour market. This will be enough for the Board to remain on hold today, though it is likely to reiterate its caution around the policy outlook by retaining the line that it is 'not ruling anything in or out'. Markets price an RBA rate cut by year-end as slightly stronger than a 50/50 chance.  

A recap: Higher interest rates are working 

At the previous meeting in May, the Board held the cash rate at 4.35% - a setting unchanged since last November. The key takeaway from the meeting was that the cash rate was assessed to be at a restrictive level, placing downward pressure on inflation by slowing demand to be more closely in balance with supply. Additionally, the Board reaffirmed its commitment to the existing monetary policy strategy, aiming to bring inflation back to the target band 'within a reasonable timeframe' in a way that preserves the employment gains achieved following the recovery from the pandemic. 

Slowing growth to reaffirm the RBA's stance 

The Board has several new inputs to consider at this meeting. The monthly CPI series reported an uptick in headline inflation to 3.6% in April and the underlying measures remaining firm at around 4%. Although this is very unlikely to have implications for the RBA's projection for a return to the 2-3% band in the second half of next year (and the midpoint in 2026), expect the Board to reaffirm that this indicates that it will not be a smooth journey back to the target.

Data on the labour market has continued to indicate that conditions remain consistent with the Board's description of 'tight'; however, the unemployment rate and the broader underutilisation rate have eased notably from their cycle lows in late 2022 to early 2023. Alongside this, the Q1 Wage Price Index suggested that the pace of wages growth (4.1%Y/Y) has likely peaked.  

The Q1 National Accounts reported that momentum in the economy slowed further in early 2024, with GDP coming in at a weak 0.1%q/q and 1.1%Y/Y - the slowest annual growth rate outside the pandemic since the early 1990s. Importantly, however, domestic demand (0.2%q/q, 2.3%Y/Y) was stronger than headline growth, and there were upward revisions to household consumption growth that imply households have been more resilient to cost-of-living pressures and higher interest rates than previously estimated. 

The outlook for consumption remains one of the key uncertainties for the Board. Consumption growth has been revised upwards, but estimates of the household saving ratio have fallen. With inflation forecast to slow further, improving real incomes are expected to support consumption. In addition, there will be interest in the Board's commentary on the cost-of-living support measures included in the recent Federal budget and other initiatives announced by state governments. 

All considered, developments since the May meeting appear unlikely to have moved the dial for the RBA from its position of awaiting more data and 'not ruling anything in or out' from a policy perspective. If the decision statement remains largely unchanged, then markets will take their cues from the tone of Governor Bullock's press conference. 

Macro (Re)view (14/6) | US inflation data drives Fed cut expectations

A softening in US consumer and producer prices significantly outweighed the Fed's policy meeting for market impact this week, driving a rebuilding of rate-cut pricing. Near enough to two rate cuts from the Fed are now discounted by year-end, despite the FOMC's updated projection being lowered from 3 cuts to 1 cut for 2024. In other central bank-related news, the Bank of Japan left rates unchanged as a continued lack of clarity around plans to dial back on bond purchases weighed on the yen. The fallout from last weekend's EU elections continues to reverberate across markets, with France at the centre of the moves following President Macron's call for a snap election. French spreads over German Bunds widened sharply; the CAC40 index fell more than 6% on the week; and the euro lost ground to the US dollar.  

Early estimates suggest the Fed's preferred core PCE deflator is on track to print at 0.2% for the second month in succession - a run rate close to what is required to be consistent with the 2% target for annual inflation in the US - after May's data on consumer and producer prices was below expectations. However, with the data coming in either side of the Fed's policy meeting, the FOMC struck a cautious tone. Headline CPI printed at 0%m/m (vs 0.1%) seeing the annual pace slow from 3.4% to 3.3%, while the core rate was 0.2%m/m (vs 0.3%) and 3.4%yr from 3.6% previously. This was subsequently backed up by a 0.2% decline in producer prices in May (2.2%yr) as energy prices fell. Broadly, these readings indicated that the disinflationary process was starting to regain some of the momentum it lost through the early part of the year. Notably, markets were encouraged by services prices (0.2%m/m/5.2%yr) posting their slowest month-on-month rise since September 2021, a sign that pressure may be abating in some of the components where inflation has been more persistent.  

The FOMC once more left rates on hold in the 5.25-5.5% range; however, the focus centred largely on the updated Summary of Economic Projections and Chair Powell's press conference. In effect, the FOMC was relatively more hawkish than it was at the previous forecast round in March, but markets have given very little weight to that interpretation given this week's inflation data. This is mainly because the FOMC raised its inflation outlook to 2.6% for the core PCE deflator this year (from 2.4%) and to 2.3% in 2025 (from 2.2%). In response, the projection for 3 rate cuts in 2024 held in March was lowered to a single 25bps cut; but 100bps of easing was then projected for next year compared to 75bps previously. Chair Powell said that the lack of progress in lowering inflation earlier in the year meant that the thinking was the easing cycle would be delayed until the data provides the FOMC with greater confidence that inflation is headed back to target. However, he indicated that more inflation data along the lines of the May report - not fully factored into the June projections - could change assessments. 

Attention in the UK turns to next week's Bank of England Policy meeting. Markets effectively priced out any chance of a rate cut following the April inflation report (released in late May) that showed a stronger-than-expected rise in services prices (5.9%yr). That pricing wasn't swayed by elements of softness in this week's labour market data, including a sharp increase in jobless claims to their highest level since 2021 and an uptick in the unemployment rate from 4.3% to 4.4%. Although the MPC is expected to hold the key policy rate unchanged (5.25%), it could potentially adjust its guidance for rates needing to remain restrictive for 'an extended period', presaging a cut in August. 

Australian labour market data looks unlikely to shift the dial going into next week's RBA meeting. The Board is set to leave the cash rate unchanged (4.35%) while retaining the guidance that it is 'not ruling anything in or out'. Employment advanced by a net 39.7k in May, making it back-to-back above consensus outcomes following the 37.4k gain in April. With the participation rate holding at an unchanged 66.8%, the strength of the employment figure drove the unemployment rate down from 4.1% to 4%. As I discuss in my full review of the report (see here), the labour market remains robust but conditions have eased from the peak levels of tightness around late 2022 to early 2023. 

Australian employment 39.7k in May; unemployment rate 4.0%

For the second month in succession, employment came in above expectations rising by 39.7k in May. This drove the unemployment rate down to 4% after it had risen to 4.1% in April. Labour force participation remained near record highs. 

By the numbers | May

• Employment increased, on net, by 39.7k in May, well above the 25k rise expected and an outcome similar to that seen in April (37.4k revised from 38.5k). 
• The unemployment rate fell back to 4% from 4.1%, matching expectations. 

• Labour force participation was unchanged (after revisions) at 66.8%, a touch below record highs. 

• Hours worked declined by 0.5% month-on-month due to illness-related absences, but annual growth swung to 0.6% from -0.8%. 

The details | May

This morning's labour force statistics from the Bureau reported a solid net increase in employment of 39.7k following the 37.4k gain in April. However, unlike in April, it was the full time segment (41.7k) that accounted for all of the increase in the latest month, with the part-time segment declining (-2.1k). In April, the composition was part-time up 45k and full-time down 7.6k. The ABS noted in today's release that many of the larger-than-usual number of people who were waiting to start new jobs following the Easter holiday period (who were counted as unemployed in the April survey) moved into employment, boosting the May figure.   

For the 3 months to May, employment averaged a 23.7k increase per month, down sharply from the figure in April (50.6k). However, that decline was driven by the surge in employment reported in February (120.4k) rolling out of the calculation for a small decline in March (-6.1k). The true momentum in employment is likely to be somewhere in between - as the increases for April and May imply. 

The participation rate held steady at 66.8% in May, resulting in the size of the labour force increasing by 30.5k. With the employment gain exceeding the number of new entrants into the labour force, the unemployment rate declined to 4.0% - partly reversing its rise from 3.9% to 4.1% in April. Alongside this, the underemployment rate (6.7%) and total labour force underutilisation (10.7%) remained unchanged from their levels in the prior month. 

Hours worked were weak again, falling 0.5% month-on-month after a 0.2% fall in April. However, these estimates are significantly affected by seasonal volatility; the April figure by the earlier timing of Easter in 2024 and the May estimate by a sharp rise in the number of workers putting in reduced hours in the month due to illness.   

In summary | May

Overall, this was another solid update on the labour market, though it shouldn't move the dial too much looking ahead to the RBA's policy meeting next week. The labour market remains robust, but conditions have eased from the peak levels of tightness seen in late 2022 and early 2023. Job vacancy and survey data continue to indicate that labour demand is solid and this should support employment through the back half of the year.  

Preview: Labour Force Survey — May

Australia's monthly Labor Force Survey is due this morning (11:30am AEST) covering the May reference period. The national unemployment rate lifted to 4.1% in April despite a stronger-than-expected employment outcome as labour force participation increased. In today's report, employment is forecast to increase by 25k, lowering the unemployment rate back to 4%.  

A recap: Unemployment rate drifts up despite a strong employment gain 

Employment increased by a net 38.5k in April, well above the 20k rise expected following a 5.9k decline in March. The part-time segment (44.6k) accounted for all of the increase in employment as the full-time segment declined (-6.1k). While recent monthly outcomes have been volatile - largely reflecting behavioral shifts in the post-pandemic labour market - employment gains averaged 50.3k (per month) for the 3 months to April, the fastest pace since May last year.    

Despite the improving momentum in employment, the unemployment rate drifted up from 3.9% in March to 4.1% in April, its highest since January and before that early 2022. But there were caveats to the rise in unemployment as it came alongside an increase in the participation rate (66.7% from 66.6%), and the ABS also highlighted that a larger number of people than unusual were waiting to commence a new job after the Easter holiday period, counted as unemployed in the April survey. 

Following strong gains in February (2.9%) and March (1.2%), hours worked flatlined (0%m/m) in April. The earlier timing of Easter in 2024 as well as school holiday periods varying across the states meant that the April outcome contained plenty of noise.  

Employment expected to advance further in May 

Employment is expected to rise by 25k in May according to the median estimate in the Bloomberg survey, albeit a forecast with very little conviction as estimates range from -10k to 107k. Given the momentum in employment, and allowing for the effect of previously unemployed workers commencing new jobs, risks could be skewed to the upside of the median forecast. The unemployment rate is expected to decline to 4% from 4.1%, though again the range of estimates is very wide (3.9% to 4.3%); meanwhile, the participation rate is anticipated to remain broadly unchanged. 

Macro (Re)view (7/6) | Global easing cycle takes further step

A rebuilding of US rate cut expectations unwound as May's nonfarm payrolls number (272k) printed well above expectations. But the situation could easily turn again given there were lingering questions over the signal from the data and with a US CPI report and Fed meeting coming up next week. Both the Bank of Canada and the ECB announced rate cuts this week, joining the SNB and Riksbank as other G10 central banks now easing monetary policy. In Australia, GDP growth disappointed expectations in Q1 and if next week's labour market data comes in soft, then pricing for RBA cuts in 2024 will likely increase.  

Australia's growth slowdown extended into early 2024 as Q1 GDP was weaker than expected at 0.1% (vs 0.2%); growth through the year moderated from 1.6% to a tepid 1.1% - its slowest pace excluding the Covid period since the early 1990s. Domestic demand is running at a more elevated 2.3% year-ended pace, but that includes a sizeable contribution from the public sector. Private demand is weak, characterised by a household sector that is cutting back in response to cost of living pressures and higher interest rates. Business investment, which had been expanding solidly, lost momentum in Q1, while headwinds continued to impact residential construction activity. For an in-depth analysis of current economic conditions in Australia, please see my feature review of the Q1 National Accounts here. 

In other developments in Australia this week, housing finance accelerated by 4.8%in April (see here) alongside a further rise in national housing prices. The current account unexpectedly fell back into deficit at -0.7% of GDP in Q1 (see here). Meanwhile, the monthly surplus on goods trade widened to $6.5bn in April but remains on a narrowing trend (see here). 

In the US, May's employment report left markets with more questions than answers. Nonfarm payrolls surged by 272k for the month, well ahead of estimates for 180k; however, employment in the household survey was reported to have fallen by 408k. As a result of the latter, the unemployment rate ticked up from 3.9% to 4% (vs 3.9% expected) - its highest since the start of 2022. This came alongside a decline in labour force participation from 62.7% to 62.5%. Rounding out the report, average hourly earnings surprised to the upside printing at 4.1%yr (vs 3.9%) from a revised 4% in April. Given the noise in the report, markets will place a lot of weight on next week's CPI report and Fed meeting. 

 

The ECB cut its key rates by 25bps (to 3.75% on the depo rate), citing that it was moderating "the degree of monetary policy restriction" in light of increased confidence in the inflation outlook. This was a move fully discounted into market pricing having been signalled at the April meeting. That said, the recent data for growth and wage and inflation outcomes had surprised to the upside, prompting revisions to the ECB's staff macroeconomic projections. This left the optics of the ECB cutting rates at the same time as upgrading the growth outlook (GDP in 2024 was revised to 0.9% from 0.6%) and raising its inflation forecasts; headline inflation is now seen at 2.5% this year (from 2.3%) and 2.2% next year (from 2%), with the core rate up to 2.8% (from 2.6%) in 2024 and 2.2% (from 2.1%) in 2025. 

In the post-meeting press conference, ECB President Christine Lagarde said that the move to cut despite the revised outlook reflected a more forward-looking approach to policy. Lagarde highlighted that inflation was still ultimately expected to return to the 2% target in Q4 2025 - an outlook unchanged since last September - and this was behind the Governing Council's vindication to cut. But Lagarde said the Governing Council was non-committal on the path rates will take from here, leaving it up to the incoming data. Markets are pricing in two additional rate cuts by year-end, occurring on a quarterly profile at the September and December meetings.   

Australia's trade surplus widens to $6.5bn in April

Australia's goods trade surplus widened more than expected to $6.5bn in April (vs $5.5bn) from a revised $4.8bn in March ($5bn reported initially). Despite export revenue falling in the month (-2.5%), a slump in import spending (-7.2%) saw the surplus widen. 

The surplus on goods trade essentially reversed the narrowing it saw in March, rebounding to $6.5bn in April. The 3-month average for the goods surplus came down from $7.1bn to $6bn, its lowest since the start of 2021. Over recent months, exports have trended lower (reflecting lower commodity prices) while imports have remained elevated.  

In April, exports fell for the third month in succession declining by 2.5% to $43.3bn, its lowest since December 2021. Non-rural goods sustained a 3.2% fall, with the major commodities all weakening: iron ore -4.3%, coal -4% and LNG -4.9%. The underlying detail from the ABS suggested these declines reflected lower prices and weaker volumes. A 3.9% decline came through in rural goods on falls in cereals (-7.5%) and meat (-3.7%).  

Imports (-7.5%m/m) posted their largest decline since last November. Nonetheless, import spending was still up by 2% over the year. The weakness was broadly based across consumption goods (-5.4%), capital goods (-5.8%) and intermediate goods (-9.6%). Consumption goods were weighed by clothing and footwear (-14.4%); capital goods saw declines in ADP (-22%) and machinery and industrial equipment (-6.2%); and intermediate goods retraced on industrial supplies (-19%) fuel imports (-8.9%). 

Australian housing finance accelerates in April

The upswing in Australian housing finance commitments remained in full flow accelerating by 4.8% in April ($29.4bn), the sharpest rise since November 2021. Increased demand for housing in line with the pace of population growth continues to drive growth in commitments, despite higher interest rates and rising housing prices. Owner-occupier commitments lifted by 4.3% to their highest level ($18.5bn) since August 2022, while the investor segment advanced by 5.6% to $10.9bn, a high back to March 2022. 

Housing finance commitments climbed 4.8% in April, a much stronger rise than the 1.5% lift expected. At $29.4bn in April, commitments are at their highest since June 2022 and up more than 26% on the cycle low from January 2023. This upswing has seen the national median housing price rise in the order of 12% over the period, according to CoreLogic's estimates.  

The owner-occupier segment saw commitments rise 4.3% ($18.5bn), their strongest lift in 27 months. The gains were broad-based across upgraders (3.4%) and first home buyers (3.4%), while construction-related lending surged (7.8%) ahead of changes to building codes. Loan volume data were consistent with these increases; loans to upgraders up 1.8%, first home buyers up 3% and construction-related jumping 9% - a lift last seen following the introduction of the HomeBuilder stimulus during the pandemic.  

Lending to the investor segment continues to ramp, increasing a further 5.6% in April ($10.9bn) - the 12th rise in the past 15 months coinciding with the cycle low. Over that period, lending to investors has surged by 39.1%. 

Refinancing is stabilising following a retracement over the back half of last year. The RBA's rate hiking cycle and the rollover of fixed-rate mortgages to higher variable rates drove an acceleration in refinancing activity from mid-2022. 

In review: Australian Q1 GDP: Slowdown extends into 2024

After slowing materially last year, momentum in the Australian economy was weak in early 2024. Real GDP increased by a softer-than-expected 0.1% in the March quarter (consensus was 0.2%), slowing growth from 1.6% to 1.1% through the year. Excluding the pandemic period, this is Australia's slowest annual growth rate in 32 years. Growth is now also tracking below the RBA's forecasts from its May Statement on Monetary Policy.     

The slowdown in Australia reflects global trends. Headwinds to growth from falling real incomes and monetary policy tightening have weighed on many peer economies; however, growth in Australia remains respectable by global standards.  

In Australia, the public sector, through cost-of-living support and infrastructure investment, has played an important role in bolstering the economy as private demand has slowed. As a result, domestic demand growth (0.2%q/q, 2.3%Y/Y) remains stronger than headline GDP growth. 

A key aspect of these National Accounts was historical revisions that indicate household consumption growth has been more resilient than previously estimated by the ABS. However, it also means that a greater proportion of the stock of excess savings accumulated by households during the pandemic has been drawn upon to support consumption. Households are benefitting from an improving real income dynamic, but the forthcoming stage 3 tax cuts and the support measures included in recent the Federal budget will also need to gain traction.  

While the RBA maintains that there is excess demand in the Australian economy, slowing growth is reducing this imbalance. Inflation remains elevated to the 2-3% target band, but the labour market has softened over the course of the past year. Overall, the cash rate (4.35%) looks to be at its peak and off the back of these soft growth figures, markets have started to reprice prospects for a rate cut by year-end.  

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National Accounts — Q1 | Expenditure: GDP (E) 0.1%q/q, 1.2%Y/Y

Household consumption (0.4%q/q, 1.3%Y/Y) — Lifted modestly by 0.4% in the quarter to be up by 1.3% through the year. Although consumer demand is tepid (and declining on a per capita basis), it is significantly stronger than previous estimates implied following backward revisions to tourism-related spending by Australian residents overseas. The main dynamic in the quarter was a 1.1% acceleration in services consumption (2.4%Y/Y) - its strongest rise since Q4 2022 - supported by overseas travel and strong attendances at major live events including the Taylor Swift Eras Tour and the Australian Formula 1 Grand Prix. By contrast, goods consumption contracted by 0.7%q/q (-0.6%Y/Y) as new vehicles (-2.4%) and household furnishings and equipment (-0.5%) retraced.

Real disposable incomes were flat in Q1 - a 1.1% rise in gross income was matched by quarterly inflation based on the household consumption deflator - but slightly positive over the past year (0.5%). An improved picture around real incomes from the historic contraction endured between Q3 2022 to Q3 2023 is a key factor now supporting consumption. Together with a continuation of robust labour market conditions - labour income was up a further 0.9%q/q (6.9%Y/Y) - and a reduction in the household saving ratio from 1.6% to 0.9%, real consumption was able to expand in Q1 despite flat real incomes. 

Dwelling investment (-0.5%q/q, -3.4%Y/Y) — Residential construction activity remained under pressure contracting by 0.5% in the March quarter and by 3.4% through the year. Capacity constraints in the availability of skilled trades - a legacy of the pandemic - and weak demand - reflecting the impacts of higher interest rates and cost increases - have weighed on activity. New home building contracted by 0.6%q/q (-1.6%Y/Y) while alterations declined by a further 0.5%q/q (-6%Y/Y) - retracing to pre-Covid stimulus levels from late 2020.  

Business investment (-0.7%q/q, 3.9%Y/Y) — Posted its first quarterly contraction (-0.7%) since Q3 2021 and its weakest outcome in 3.5 years, reducing annual growth from 8.8% to 3.9%. The upswing in non-residential construction of the past 3 years or so was held back by constraints in Q1 falling 4%, with declines in building (-3.1%) and engineering work (-4.8%). By contrast, equipment investment advanced by 2%q/q, driven by increased capital expenditure on data centres.  

Public demand (0.6%q/q, 4.5%Y/Y) — Remains elevated as a share of GDP post the Covid period, providing a key support to growth as private demand has slowed. Public demand increased by a further 0.6% in the March quarter to be up by 4.5% over the year. This was driven by government expenditure (1%q/q) associated with medical services spending and cost-of-living support measures for rents and energy bills. Public investment declined (-1.2%q/q) for the second quarter in succession; however, it has risen over the past year (5.9%) as progress in the rollout of infrastructure projects (including in renewable energy) has ramped up.   

Inventories (0.7ppt in Q1, -0.3ppt yr) — Added 0.7ppt to quarterly activity, but a modest headwind to growth over the past year (-0.3ppt). Non-farm inventories expanded by $2.6bn, led by imported consumption and intermediate (used in production) goods. Mining inventories lifted on increased production.

Net exports (-0.9ppt in Q1, -0.7ppt yr) — Deducted 0.9ppt from growth in Q1 - the largest drag on output from net exports since Q3 2022. Import volumes accelerated by 5.1% quarter-on-quarter (7.4%Y/Y), more than rebounding from a 3.5% decline in Q4. The rebound was driven by a broad-based lift in imported goods (6.5%), including machinery and industrial equipment (9.1%). Services imports saw a modest rise (0.7%) following a large decline in the previous quarter (-4.5%). Exports underwhelmed with a 0.7% rise in Q1 (3.2%Y/Y) following a 1.3% fall in Q4. A 1.1% rise in goods exports was led by non-rural goods (1.4%), with resources advancing (1%) on strong demand for Australian LNG. By contrast, services exports saw their second decline in succession (-1.1%q/q) on signs that the boost to spending from overseas students and tourists is fading. 

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National Accounts — Q1 | Incomes: GDP (I) 0.2%q/q, 1.1%Y/Y 

National income growth moderated in the March quarter as prices of key commodity exports declined. The terms of trade were little more than flat in Q1 (0.2%) but are down by 7.2% through the year and 12% off the record high in mid-2022. Export prices saw a 1.8% fall in the quarter, driven by lower commodity prices due to weaker global demand. However, this was attenuated by import prices declining by 2%q/q alongside falling oil prices and a stronger Australian dollar. 

Nominal GDP lifted by 1.4% in the quarter, a similar increase to the previous three quarters. However, base effects slowed the annual growth rate from 4.5% to 3.5%, down from a 9.5% pace a year earlier. 

Turning to company profits, private sector non-financial corporations gross operating surplus lifted 2.2% in the quarter - against a 7.3% decline over the year. In Q1, profits were driven by professional and technical services to support increased investment in data centres, and by accommodation and food services associated with the major concerts and sporting events held across the nation. Financial corporations operating surplus saw a 1.3%q/q rise to 6.9%Y/Y, with the effects of higher interest rates boosting banks' net interest margins. 

For wage incomes, compensation of employees advanced overall by 1% in Q1 and 7.1% in year-ended terms, down from 8.4% previously. The main driver of the increase was the public sector (1.6%q/q), boosted by backpay and pay rises in Commonwealth agencies and by state government increases to pay for health and education workers. Private sector wages (0.9%q/q) were supported by bonuses and redundancy payments. 

Productivity growth remains weak; however, it has improved over recent quarters. A 0.1% increase in Q1 followed gains of 0.5% (Q4) and 1.1% (Q3). Alongside this, unit labour cost pressures have moderated, a welcome development for the RBA.    

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National Accounts — Q1 | Production: GDP (P) 0.1%q/q, 1.0%Y/Y

The March quarter production estimate of GDP was 0.1%, slowing from 1.6% to 1% at an annual rate. Gross Value Added (GVA) by services industries increased by 0.2%q/q compared to a 0.4%q/q contraction from goods-related industries. 

In the services sector, household services (0.5%) led the way. This included a 2.7% boost from arts and recreation associated with the major sporting events and concerts hosted during Q1 and from national lottery draws that increased gambling activity. Business services were soft overall (-0.1%q/q) as reduced labour hire activity weighed on administration (-0.5%), and information media and telecommunications declined (-1.5%) as advertising was scaled back.  

Large declines in a couple of key industries weighed on the goods sector. Goods production (-0.3%) weakened on the back of a 2.6% fall in construction, with construction services, non-residential construction and heavy and civil engineering all contributing to the decline. Meanwhile, weakness in goods distribution (-0.4%) was driven by a 2% fall in wholesale trade as new vehicle sales slowed.