Australia's trade surplus widens to $5.6bn in June

Australia's goods trade surplus came in above expectations at $5.6bn in June from a downwardly revised $5.1bn in May. Moderating strength in export revenues and elevated import spending has seen the size of the trade surplus narrow. The surplus for the June quarter was $16.3bn, down from $20.4bn in the March quarter and the lowest quarterly total since Q4 2020.   

Monthly exports lifted by 1.7% to $43.8bn in June (-2.8%yr). This reflected increases across the board: rural goods 5.6%, non-rural goods 0.8% and non-monetary gold 5.6%. However, export values saw a 3.4% decline for the June quarter, retracing to $129.3bn - the lowest level since the final quarter of 2021. Commodity price weakness on softer global demand led to weakness in rural goods (-5.1%) and non-rural goods (-3.6%). The ABS's trade price series, also released today, showed export prices were down 5.9% for Q2 as iron, coal and natural gas all saw material price declines. 

Imports for June moderated to a 0.5% rise following a 3.3% lift in May. The total for imports in the month was $38.2bn, remaining around record highs. Imports for the June quarter came to $112.9bn, a slight decline (-0.5%) on the previous quarter, but again at a level just off record highs. The main movements in the quarter were declines in consumption goods (-1%) and intermediate goods (-0.5%); by contrast, capital goods advanced (0.7%). The ABS reported a fairly modest 1% rise in import prices in Q2. This combination of increased spending but lower prices implies volume demand for imports contracted.  

Australian retail sales 0.5% in June; Q2 volumes -0.3%

Australian retail sales rose solidly for the second month in succession up by 0.5% in June (vs 0.2% expected) as end-of-financial-year sales continued to drive spending. However, quarterly volumes still contracted by 0.3%, highlighting that household demand remains weak amid cost-of-living pressures and higher interest rates. 

Nominal retail sales lifted by 0.5% in June following increases of 0.6% in May and 0.2% in April. This amounted to a 0.7% rise in retail turnover across the June quarter, the strongest quarterly rise since Q4 2022. Despite promotions and discounting during end-of-financial-year sales, retail prices still increased during the quarter seeing a 0.9% rise (2.6% year-on-year). As a result, inflation-adjusted sales (or volumes) contracted by 0.3% for the quarter and by 0.6% through the year, painting a picture of weak demand as households have been forced to cut back due to the higher cost of living and to meet increased mortgage repayments. 

The key details for quarterly volumes showed weakness across categories including food (-0.9%), clothing and footwear (-1.7%), department stores (-0.8%) and cafes and restaurants (-0.7%). There were increases in volumes for household goods (1.3%) - the ABS highlighting a boost in items such as furniture, bedding, TVs and laptops - and from 'other' retailing (0.9%). 

Retail price inflation (0.9%) posted its strongest quarterly rise since Q2 2023; however, the annual rate has remained steady around a 2.5% pace over the past few quarters. This is still a relatively elevated pace in a historical context but is down substantially from the peak in late 2022 (7.4%).  

Australian Q2 CPI 1%, 3.8%Y/Y

Australia's CPI inflation report for the June quarter is set to keep the RBA on hold at next week's policy meeting. Markets had factored a rate hike at around a 30% chance, but this has been completely priced out post release as headline CPI matched expectations at 1% quarter-on-quarter and 3.8% year-on-year (up from 3.6% previously), while the key trimmed mean measure (the RBA's preferred gauge of core inflation) was softer than anticipated at 0.8%q/q and 3.9%Y/Y (down from 4%). These outcomes compare to the RBA's May forecasts of 3.8% year-on-year inflation for both headline and core CPI. A hawkish revision to the RBA's outlook for a return to the midpoint of the 2-3% inflation target band in 2026 - the logical threshold for an August hike - looks unlikely after today's report. 

The June quarter CPI print showed headline inflation came in at 1% in quarter-on-quarter terms, unchanged from the March quarter. The composition of inflation was slightly more encouraging in the latest quarter as services inflation eased from 1.4%q/q to 1%q/q - though the annual rate firmed from 4.3% to 4.5%, an elevated pace that will remain central in the RBA's justification to maintain a restrictive monetary policy stance. The major contributors to services inflation in Q2 were international holiday travel (8%q/q) amid peak demand for travel during the northern hemisphere summer; rents (2%q/q) reflecting very tight vacancy rates (but moderated by a government assistance scheme); and medical and hospital services (2.1%q/q) as private health insurance premiums rose.   

Despite a softer services figure, inflation was held up by a few key factors, mainly in the more volatile items. Prices for fruit (10.6%q/q) and vegetables (3.3%q/q) lifted, driving a higher contribution to inflation from the grocery basket than in Q1. Fuel prices - coming off a 1%q/q fall in Q1 - rebounded to post a 1.7%q/q rise that added almost 0.1ppt to quarterly inflation. Clothing and footwear prices rose (3.1%q/q) following discounting during the March quarter, leading to durable goods pushing up on inflation in Q2. Household utilities (water, energy), which also subtracted from inflation in Q1, swung to a positive contribution this quarter (0.8%q/q). 

The overall takeaway from today's report is that there looks to be little basis for the RBA to hawkishly adjust its 2026 timeframe for returning inflation to the midpoint of the target band. The RBA has said it has little tolerance for a timeframe any longer than this, but the risks of that occurring haven't increased on the Q2 CPI numbers. This leaves the Board in a position where it can retain its message of needing to remain vigilant but not needing to hike. 

Preview: Q2 CPI

Australia's long-awaited CPI inflation report for the June quarter is due at 11:30am (AEST) today. Coming ahead of next week's RBA meeting, today's report holds a lot of sway with markets in terms of setting expectations for either the continuation of an unchanged cash rate (4.35%) or a 25bps rate hike. The consensus forecasts are for headline inflation of 1% quarter-on-quarter and 3.8% year-on-year, with core CPI anticipated to print at 1%q/q and 4%Y/Y. 

A recap: Disinflationary progress slowed in the March quarter 

The pace of disinflation in Australia slowed in early 2024 as the key CPI outcomes for the March quarter came in above expectations. Quarterly inflation saw an uptick to 1% in both headline and trimmed mean (or core) terms from 0.6% and 0.8% respectively in Q4 2023. As a result, annual inflation to the March quarter saw smaller declines, with the headline CPI easing from 4.1% to 3.6% while the core rate softened from 4.2% to 4%. 

Higher quarterly inflation was predominantly driven by the services basket. Cost increases in areas such as education costs (5.9%), rents (2.1%) and medical services (2.2%) underpinned a 1.4% rise in services inflation in the quarter. By contrast, goods inflation was a modest 0.5% in Q1. Components that pushed up goods prices included new dwellings, vegetables and pharmaceutical products. This was moderated by declines in furniture, electricity and fuel prices. 

June quarter preview: Inflation pressures remain firm; services prices the key factor

The monthly CPI reports for April and May have indicated that inflationary pressures did not ease up in the June quarter. Based on these reports, the consensus call is that both headline and core CPI will again print at 1% in quarter-on-quarter terms. This would see annual inflation firming from 3.6% to 3.8% for headline CPI and the core rate holding at 4%. Those expectations compare to the RBA's forecasts of 3.8% year-on-year inflation for headline and core CPI in its May Statement on Monetary Policy. 

Services prices - the key unknown going into today's report - have the potential to sway the key inflation outcomes one way or another. Only limited information can be gleaned from the April and May reports given that many services prices used to calculate the quarterly CPI are updated in the month of June. Key price updates will come through on items including utilities (water, electricity and gas), medical and health services, some household services (child care and vets), and financial services. 

At its most recent meeting in June, the RBA Board noted that it needed to '... remain vigilant to upside risks to inflation' and that it was '... not ruling anything in or out' from a policy perspective. Going into today's report, markets assess the chance of an August rate hike to be relatively low at around 30%. An upside surprise in the key inflation outcomes would likely swing the odds in favour of a hike. 

However, I think there is a higher threshold for the RBA to hike. Following today's report, the RBA will revise its inflation forecasts for the Board to consider at the August meeting. In my view, a hike would require the RBA to anticipate a more delayed return to the midpoint of the 2-3% inflation target band than the current view for 2026 or for the Board to judge that there are material risks to that outlook that require a policy response. It does not necessarily follow that upside surprises for Q2 CPI will affect the inflation forecasts over a policy-relevant timeframe. What needs to be considered is the effects of various government subsidies (namely energy bill rebates) that will reduce measured inflation over the coming year. 

Australian dwelling approvals -6.5% in June

Australian dwelling approvals saw their first monthly decline since January posting a 6.5% fall in June (vs -2.5% expected), reversing May's 5.5% rise. House approvals have trended up through the first half of the year - contrasting with unit approvals that remain on the lows for the cycle. 

Dwelling approvals for June saw a 6.5% decline on the prior month, retracing to a 13.2k total. This was the first decline for headline approvals since January; however, despite the recent improvement, approvals remain at very low levels as higher interest rates and construction-related issues continue to impact residential construction activity. Across the June quarter, approvals came in at 40.8k, a 3.9% increase on the March quarter. Within this, house approvals advanced by 6.4% to 27.5k; by contrast, higher-density approvals declined by 1% to just 13.3k remaining on cycle lows. 

Approvals for home alterations lifted by 10.2% in June to $1.2bn, continuing a volatile trend over recent months. Over the June quarter, the value of alteration work approved advanced by 5.8%. Renewed cost increases for materials and labour are likely the driving factor, with the Q1 national accounts reporting ongoing weakness in this activity. 

Macro (Re)view (26/7) | Looking to the week ahead

A shake-out of consensus positions directed markets this week amid a quiet macro calendar. Lacking a fundamental catalyst, higher volatility reflected a combination of factors including the view that the Fed could already be behind the curve in terms of its easing cycle, earnings results that did not validate elevated tech valuations and the unwinding of short yen positions. Next week's calendar returns the focus to macro factors, with policy meetings from the Fed, BoE and BoJ, US nonfarm payrolls and inflation data in the euro area and Australia. 

Despite concerns building around the outlook, US GDP expanded well above expectations increasing by 0.7%q/q in the June quarter as year-ended growth firmed from 2.9% to 3.1% - a pace well above peer economies. Solid domestic demand conditions (0.7%q/q, 3.0%Y/Y) continued to underpin growth, driven in turn by a household sector (personal consumption 0.6%q/q, 2.5%Y/Y) backed by rising real incomes and a still-robust labour market. A further tailwind to consumption from Fed rate cuts will likely come closer to fruition at next week's FOMC meeting as more of the path leading to the first cut is paved. Inflation remains on track to come back to the 2% target, albeit gradually with the headline PCE deflator softening from 2.6% to 2.5%yr in June and the Fed's preferred core PCE deflator holding at a 2.6%yr pace.  

Over in Europe, a soft set of PMI readings for July came after the ECB at last week's meeting assessed that risks to the growth outlook were now 'tilted to the downside'. Euro area growth picked up in the March quarter, but that momentum looks to have softened across Q2, while the July PMIs suggest it has been a subdued start to Q3. The composite PMI was 50.1 in July - on the line that separates growth from contraction - down from a 50.9 reading in June. Activity in the services sector slowed but was still expanding (51.9 from 52.8); however, continued weakness was evident in manufacturing (45.6 from 45.8). In the UK, attention is on next week's Bank of England meeting in what could be a line-ball call between a 25bps rate cut or a hold from the Monetary Policy Committtee. 

Australia's influence should become more lively next week with the key June quarter CPI report due on Wednesday. Expectations are for the inflation outcomes to remain firm on both a headline (1%q/q, 3.8%Y/Y) and core basis (1%q/q, 4%Y/Y). Upside surprises in core inflation and/or services prices are seen as a risk of leading the RBA to an August rate hike; however, a higher threshold may need to be cleared for that to occur - that being the CPI report causing the RBA to anticipate a more delayed return to the midpoint of the 2-3% inflation target band from the current forecast for 2026. 

Macro (Re)view (19/7) | US election trades move into focus

US election trades drove markets this week as positioning for a Trump victory sent the dollar higher and lifted rates. Equity markets were dented by prospects for trade tariffs. This contrasts with the recent macro factor of central bank easing cycles that has supported risk sentiment. Accordingly, the Australian dollar saw its steepest weekly fall against the US dollar in 3 months, despite strong domestic labour market data.  

Another upside surprise for Australian employment keeps prospects for an RBA hike in play, though the upcoming CPI report (31 July) still holds the key. Employment accelerated by 50.2k in June, well above the 20k consensus and its strongest outcome in 4 months. Although the unemployment rate lifted to a rounded 4.1% this came alongside a rise in the participation rate to 66.9%, only a tick below the cycle and record high from late last year. More on the June Labour Force Survey can be found in my review here.   

Remarks from Federal Reserve Chair Powell and Governor Waller endorsed pricing for near-term monetary policy easing. Chair Powell said that recent inflation data are adding to the Fed's confidence that inflation is on track to return to target; Governor Waller said it was still too early to declare victory on inflation but that the Fed needed to be mindful of the risks of waiting too long to start cutting rates. Retail sales data for June came in above expectations suggesting the Fed can take a measured approach to easing. Headline sales were flat month-on-month, but rises in core sales at 0.8% and control group sales 0.9% - both better gauges of spending momentum - accelerated across the month.     

A low-key policy meeting saw the ECB into its summer break as all key interest rates were left unchanged. A follow-up rate cut to the move in June was out of the question this week, with the ECB awaiting additional data and a new forecast round due upon its return in September. Markets anticipate a rate cut at that meeting and then another in December. The key message ECB President Lagarde conveyed at the press conference was that the Governing Council would not be pre-committing to further rate cuts - as it effectively did in June - taking an approach of 'meeting-by-meeting data dependency' to its decisions. President Lagarde reiterated that a key part of the Governing Council's deliberations would be around wages, profits and productivity - factors all pertinent to assessing the persistence of services inflation.  

In terms of the outlook, the Governing Council tweaked its assessment of the risks to economic growth to being 'tilted to the downside' from an earlier view of 'balanced in the near term but... tilted to the downside in the medium term'. That shift was made in response to data indicating growth has slowed since the first quarter of the year. The Governing Council attributed the recent slowing in the disinflation process to 'one-off factors' and noted that most measures of inflation were 'either stable or edged down in June'. At this stage, the ECB continues to expect that inflation will be back at the 2% target in the second half of next year. 

In the UK, markets repriced the timing of the first BoE rate cut of the easing cycle from August to September following this week's inflation and labour market data. The key inflation gauges remained unchanged in June, printing firm relative to expectations for mild declines: headline CPI 2% (vs 1.9%); core CPI 3.5% (vs 3.4%) and services CPI 5.7% (vs 5.6%). In its May forecasts, the BoE highlighted that the second-round effects of higher inflation on domestic prices and wages will delay a sustained return to the target of 2% inflation until 2026. Wage pressures are easing, softening from 6% to 5.7% on an annual basis for the 3 months to May; however, that is still an elevated pace, consistent with resilient UK labour market conditions. 

Australian employment 50.2k in June; unemployment rate 4.1%

Australian employment continues to remain strong in the face of expectations for a slowdown amid weaker growth. Employment lifted by 50.2k, outperforming the market consensus for the third month running, and by a considerable margin relative to June's forecast (20k). Although the unemployment rate lifted from 4.0% to 4.1%, this came alongside a rise in the labour force participation rate to near record highs.  

By the numbers | June

• Employment increased by a net 50.2k in June - its strongest outcome in 4 months - defying expectations for a moderation to a 20k rise following gains of 39.5k in May and 36.2k in April. 
• Headline unemployment lifted from 4.00% in May to 4.05% in June, rounded up to 4.1% by the ABS in today's report, matching expectations. Underemployment declined from 6.7% to 6.5%, resulting in a fall in total underutilisation to 10.5% from 10.7% in May.  

• Labour force participation increased from 66.8% to 66.9%, pushing 2023's record highs. 

• Hours worked increased by 0.8% in the month (1.4%yr) to be up by a robust 1.6% across the June quarter.

The details | June

After increasing solidly in April and May, employment accelerated to a 50.2k net rise in June - against expectations for a moderation. In the latest month, the gain was driven by full time employment (43.3k), with the part time segment also expanding (6.8k). Highlighting that labour demand remains resilient to slowing growth through the first half of the year, employment increased by 125.8k (0.9%) in the June quarter, matching the growth seen in the March quarter (128.3k, 0.9%). These outcomes are also a clear step up from the employment gains seen in the final three quarters of 2023: 84.5k in Q2, 78.5k in Q3 and 55.8k in Q4.

Given the strength in employment, the unemployment rate was held to an average of 4% across the June quarter - up only slightly from Q1 (3.9%) and a little above the cycle lows of 3.5% in late 2022/early 2023. Although tightness in the labour market has eased, these are still very historically strong conditions in Australia. Speaking to this point, the Bureau noted in today's reporting that both underemployment (6.5%) and underutilisation (10.5%) - broader measures of spare capacity in the labour market - remain significantly lower than on the eve of the pandemic, down by 2.3ppts and 3.4ppts on their respective levels in March 2020. 

On the supply side of the labour market, the participation rate increased to 66.9% in June to stand very near to record highs; this is also the case for the employment to population ratio - the share of working-age Australians in employment - at 64.2%. Inward migration post the pandemic has added strongly to labour supply and contributed to economic demand, helping to keep employment supported.   

Rounding out a solid report, hours worked lifted by 0.8% in the month. Although illness-related absences remained elevated (4.5% of employed people worked fewer hours than usual in June compared to a pre-pandemic average of 3.6%), this was offset by a reduction in annual leave, with 12.5% of employed people working reduced hours due to being on holiday, well down on the pre-Covid average of 14.5%. Overall, hours worked expanded by a robust 1.6% in the June quarter. 

In summary | June 

Despite a backdrop of slowing economic growth, the Australian labour market remains resilient. Labour market tightness has eased; however, employment growth is solid, unemployment is low and participation is near record highs. This is all broadly in line with RBA forecasts and in that sense today's report is unlikely to change assessments ahead of the meeting on 5-6 August. If there is to be another hike in this cycle, it will be in response to an upside surprise in the CPI report for Q2 (31 July). 

Preview: Labour Force Survey — June

Australia's monthly labour force survey for June is due this morning (11:30am AEST). Markets anticipate a rise in the unemployment rate to 4.1% from 4%, albeit driven by a slower rise in employment (20k) rather than job losses. Tighntness in the labour market has been easing gradually, broadly in line with RBA forecasts. The unemployment rate has trended up from cycle lows of 3.5% in 2022, though it remains at its lowest levels since 2008 and prior to that the 1970s. Meanwhile, job vacancies as a share of the labour force moderated to 2.4% in the latest data, down from a peak of 3.4% in 2022. 

May recap: Unemployment fell back to 4% as employment beat expectations 

Employment increased by a net 39.7k in May, comfortably outperforming the expected 25k rise on the back of a similar gain in April (37.4k). In the latest month, employment was driven by the full time segment (41.7k) as part time employment declined (-2.1k), a reversal of the composition seen in April (part time 45k/full time -7.6k). 

After rising to 4.1% in April, the unemployment rate fell back to 4% in May. This was due to the net increase in employment (39.7k) exceeding the rise in the labour force (30.5k). In level terms, the participation rate was steady at 66.8%, close to the November 2023 record high (67%) and little changed over the past year. 

A rise in illness-related absences weighed on hours worked in May (-0.5%m/m) following a 0.2% fall in April. The ABS estimated that 4.2% of employed Australians worked fewer hours than usual in the month, which compares to a pre-Covid average of 3.5% at the same time of year. Annual growth in hours worked has slowed significantly over the past 12 months from 5.2% to a 0.6% pace in May, a sign of adjustment in the labour market to the economic backdrop. 

June Preview: Seasonal slowdown in employment anticipated   

A moderation in employment to an increase of 20k is expected in June, with forecasts ranging from -20k to 40k. This would be a step down from the momentum of the past couple of months, but seasonal factors may be at play. The ABS's high-frequency payrolls index recorded a slower rise of 0.1% for the 4 weeks to mid-June, a similar movement to 12 months earlier. The Bureau noted that softer payrolls growth came after employment rebounded post the Easter and school holiday periods. Given the expectation for a moderation in employment, the unemployment rate is forecast to lift to 4.1%, based on the labour force participation rate remaining broadly unchanged (66.8%).   

Macro (Re)view (12/7) | Fed closer to easing

Soft US inflation data is likely the green light the Fed has been looking for to start lowering rates, with markets pricing the first cut for the September meeting. More confidence that a Fed easing cycle is nearing played out through lower Treasury yields, led by the front end of the curve as the 2-year tenor declined 15bps this week compared to a 10bps fall for the 10-year. In FX, this dynamic led to a weaker US dollar, notably so against the Yen where markets sense the BoJ and MoF swung into action with another intervention post the US CPI report. Although the major US equity indices saw modest gains, a rotation from growth to value drove small caps to a 6% rally for the week. Some of the highlights on next week's calendar include a speech from Fed Chair Powell, UK CPI data, ECB policy meeting and employment data in Australia. 

After almost a year of peak interest rates in the US, the data flow is closing in on providing the Fed with the 'increased confidence' it requires to start loosening restrictive monetary policy. Markets now fully discount 2 rate cuts in the US by year-end, with the prospect of a third cut in play. This is in response to June's soft nonfarm payrolls report, while this week's key CPI report came in weaker than expected - with markets effectively ignoring an upside surprise in producer prices (0.2%m/m, 2.6%yr). Additionally, Fed Chair Powell appearing at his parliamentary testimony noted that with inflation having slowed significantly and the labour market cooling, there was a risk that the FOMC could 'unduly weaken' the economy and employment if it moved too late in dialing back restrictive monetary policy.

A 0.1% decline in headline CPI for June (vs 0.1% expected) saw the annual pace slow from 3.3% to 3% (vs 3.1%), while the core rate came in at 0.1%m/m (vs 0.2%) and 3.3% over the year (vs 3.4%), down from 3.4% previously. These outcomes followed an encouraging report in May, the trend indicating price pressures have eased materially since increasing earlier in the year. Accordingly, the 3-month annualised rates have slowed to 1.1% headline and 2.1% core to be at lows to June 2020 and March 2021 respectively. The composition of goods disinflation (-0.3%yr) combined with elevated services inflation (5%yr) remains, but the latter is starting to show signs of abating. Notably, shelter costs saw their slowest month-on-month rise (0.2%) since August 2021 and the annual pace (5.1%) has eased to a 26-month low.  

In the UK, an upbeat print for monthly GDP of 0.4% in May (vs 0.2%) and relatively hawkish commentary from BoE officials has moderated expectations for an August rate cut. Although hesitation around easing policy was not unexpected from hawkish BoE members Haskel and Mann, markets reacted to a speech from BoE Chief Economist Pill - considered a closer guide of the consensus view of the Monetary Policy Committee - that mentioned that upside risks to inflation via services prices and the labour market were still present. Next week's CPI data (June) will be key to resetting expectations around the timeline for the BoE to start cutting rates. 

Turning to Australia, consumer sentiment on the Westpac-Melbourne Institute Index declined in July (-1.1%) and remains at a very weak level (82.7) that has changed little over the past couple of years. A key finding in the report dampening sentiment was an increased expectation for further rises in mortgage rates. The NAB Business Survey reported a softening in business conditions to a below-average level (+4) as all of the major subcomponents (trading, profitability and employment) slowed; however, business confidence surprisingly improved to its highest level since early 2023. Meanwhile, housing finance slowed in May falling by 1.7% (see here); however, that is in the context of a sharp acceleration where monthly commitments ($28.8bn) have surged almost 24% from the cycle low early last year.

Australian housing finance -1.7% in May

Australian housing finance fell for the first time in 4 months in May (-1.7% vs +1.8% expected), but the value of commitments ($28.8bn) was still up by 18% compared to 12 months ago. Lending to both major segments moderated in the latest month: owner-occupiers -2% and investors -1.3%, while refinancing activity continues to stabilise. The May report comes against the run of play where fundamentals in the housing market have driven up housing prices and seen lending rise.  

May's 1.7% decline in housing finance commitments came after 3 months of accelerated gains, rising by a cumulative 11.6% over February-April. This is also a very modest fall in the context of the broader upswing underway, with commitments up 18% over the past year and 23.9% above the cycle low in January 2023. The fundamentals of tight supply and strong demand associated with population growth are understood to have outweighed the effect of higher interest rates, resulting in rising housing prices and with it increased lending. Last week, CoreLogic reported that the national median house price lifted by 8% over the year to June to just over $790k.  

Owner-occupier commitments posted a 2% decline in May to ease to $18.1bn (12.2%yr). The declines were broad based across the segment: upgraders -2.2%, construction-related -2.6% and first home buyers -2.9%; however, lending for alterations was up 8.7% to be up nearly 70% on its level from 12 months earlier. The declines in lending were matched by falls in loan volumes: upgraders -1.2%, construction-related -3.3% and first home buyers -3.3%.  

Commitments to the investor segment were down a modest 1.3% in the month to come in at $10.7bn. Since hitting their trough in March 2023, lending has risen in 11 of the past 14 months to be up by 37.1% over the period as increasing rents and housing prices have encouraged investors. 

Lending to investors has risen sharply in most states over the past year, with Queensland recently overtaking Victoria in second place in terms of the highest value of monthly commitments, behind New South Wales.  

Refinancing was little changed in May, continuing to stablise following the run-up in activity prompted by the reset of fixed-rate mortgages to higher variable rates. Owner-occupier refinacing has retraced to levels seen in 2021, prior to the RBA's tightening cycle. 

Macro (Re)view (5/7) | US data boosts Fed rate-cut prospects

Equities saw solid gains this week, underpinned by US tech, with lower bond yields and a weaker dollar supporting risk sentiment. The UK general election went as the polls had predicted and was a non-event for markets. Politics remains in focus over the weekend with the second round of the French elections taking place, though with Le Pen's RN party looking unlikely to secure a majority a tail risk in market pricing has reduced. Comments from Fed Chair Powell at the ECB's Sintra Forum that US disinflation is back on track as well as soft labour market and activity data moved markets closer to pricing in a September rate cut. This comes ahead of next week's key CPI and PPI reports for June. 

Signs of a cooling US labour market upped dovish bets on a Fed rate cut in September to a 75% chance, with markets close to discounting two cuts by year-end. Although the June employment report showed nonfarm payrolls increased by a stronger-than-expected 206k (vs 190k forecast), this was weighed by downward revisions subtracting a net 111k from employment over April-May. As a result, the 3-month average for nonfarm payrolls has slowed to 177k, its lowest since the start of 2021. The headline unemployment rate now stands at its highest level since late 2021 after rising from 4% to 4.1% in June; however, that came alongside an increase in the labour force participation rate from 62.5% to 62.6%. Reflective of easing tightness in the labour market and slowing inflation, annual growth in average hourly earnings moderated to a 2-year low at 3.9% from 4.1% previously. Meanwhile, weak readings in the ISM surveys for services (48.8) and manufacturing activity (48.5) in June were indicative of slowing growth momentum. 

Opening the ECB's Sintra Forum, ECB President Lagarde spoke about steering monetary policy through the current cycle. Unique to this cycle, the ECB's tightening has seen a faster pace of disinflation than previous episodes, but the labour market has remained significantly more resilient. The ECB cut rates in June and the account from the meeting cast more light on the decision. Easing monetary policy reflected increased confidence that inflation was headed durably back to the 2% target. This approach was characterised as a 'judgement call' intended to guard against the risk of rates remaining too high for too long. The fact there were dissenting views and that the inflation data remains elevated suggests that the ECB's easing cycle will progress at a measured pace. Inflation data for June this week showed the headline pace easing from 2.6% to 2.5%yr (vs 2.5%) and the core series remaining at 2.9%yr (vs 2.8%). 

Turning to Australia, confidence in the existing monetary policy strategy to return inflation to target saw the RBA Board holding rates steady last month. This was a key message conveyed in the June meeting minutes. The Board remains wary that upside inflation risks could prompt further tightening - a scenario markets price as around a 50/50 chance - but the RBA is reluctant to hike, unless the Q2 CPI report (due 31 July) forces its hand. At the June meeting, a hike was considered on the basis that rates weren't 'sufficiently restrictive' to bring inflation back to target 'within a reasonable trameframe'; however, policymakers did not see evidence to draw that conclusion. Instead, the view was that rates were working to slow the economy in a manner consistent with inflation back at target in 2026 while also preserving the post-Covid employment gains. 

Data to hand this week was on the strong side of expectations but noisy at the same time. End of financial year discounting drove a 0.6% rise in retail sales for May, their strongest increase since the start of the year (see here). Gains were broad-based across food and discretionary categories for the month, but sales momentum remains weak amid cost-of-living pressures and higher interest rates. Dwelling approvals posted their strongest rise since last October up by 5.5% in May but remain at low levels (see here). The fundamentals of tight supply amid strong demand continue to drive housing prices higher, up nationally for the 17th month running in June (0.7%) according to CoreLogic. Lastly, the monthly goods surplus narrowed to $5.7bn in May, a continuation of the recent momentum (see here). Iron ore boosted exports (2.8%) to their strongest rise since last August only to be outpaced by a lift in imports (3.9%). 

Australia's trade surplus narrows to $5.7bn in May

The balance on Australia's goods account narrowed to a surplus of $5.7bn in May from a downwardly revised $6bn in April ($6.5bn prior), disappointing expectations for a $6.2bn figure. In positive news, exports (2.8%) saw their strongest rise in 9 months; however, this was outpaced by a 3.9% increase in imports.

The trade surplus for May at $5.7bn was little changed from April ($6bn) but well up from the recent low in March ($4.3bn). This saw the 3-month average for the trade surplus moderating to $5.4bn (from $5.7bn in April) - its lowest since December 2020 -  down substantially from its level at the end of 2023 ($9.6bn). An adjustment in commodity prices associated with weaker global growth has weighed on exports while import spending has trended higher amid resilient domestic demand and slower goods disinflation in Australia compared with peer economies.    

Exports in May lifted by 2.8% to $44bn (-7.8%yr), their first rise in 4 months and the strongest gain seen since August last year. This was driven largely by non-rural goods (3.7%), with iron ore exports posting a 6.3% rise that broke a run of declines between December and April, falling 17.4% over the period. Today's release reported that higher iron ore exports reflected the combination of a lift in prices and shipment volumes. Across the other commodities, other mineral fuels (mainly LNG exports) advanced by 1.7%m/m and coal exports were a touch softer (-0.2%m/m). 

By contrast, rural goods declined (-1.2%) to be down by 15.9% over the year and nearly 25% below their mid-2022 high. Cereal exports have been the major driver of this retracement (-51%yr) coming after prices surged following the disruptions to global wheat exports stemming from the war in Ukraine.    

Imports lifted by 3.9% month-on-month coming to $38.2bn, up modestly over the year (3.5%). Spending on imports in May was supported mainly by intermediate goods (6.6%) on the back of a surge in fuel imports (10.8%) as global oil prices advanced. Also driving imports in May were consumption goods (2.4%) and capital goods (0.5%), though both categories were coming off sizeable declines in the prior month of 5.3% and 6.4% respectively.