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.