Australian retail sales rise 0.7% in August

Australian retail sales surprised on the upside of expectations posting a 0.7% lift in August (vs 0.4% forecast), the strongest gain since the start of the year. The ABS pointed to a warm finish to the winter and the early timing of Father's Day as the contributing factors. Although households remain under pressure from the cost of living and higher interest rates, sales increased by 3.1% across the year, the fastest pace since May 2023.   

Retail sales rose by 0.7% in August following a soft result in July (0.1%). This was the strongest gain for monthly sales since January. Over the 3 months to August, retail sales averaged a 0.4% increase, a modest pace but an improvement on the momentum in recent times. 

In the latest month, discretionary spending (0.8%) played a key role in the rise in the headline figure. Meanwhile, food sales (0.6%) were also solid. The ABS noted in today's release that unusually warm weather pulled Spring spending forward, boosting categories such as clothing and footwear (1.5%), liquor (2.8%), recreational goods (2.4%) and cafes and restaurants (1.0%). Spending in August was also supported by the timing of Father's Day, which fell on September 1. 

Spending growth was strong across most states in August. Gains of 0.7-0.9% were seen in New South Wales, Victoria, Queensland and Tasmania, but South Australia (0.3%) and Western Australia (0.4%) underperformed. Annual growth in the two largest states (NSW and Vic) is running in the 2-3% range, up from the lows earlier in the year but still subdued. 

Macro (Re)view (27/9) | RBA resists global easing cycle

A raft of stimulus measures from the authorities to support economic growth in China rocketed equity markets in the mainland and HK this week, a tailwind to other parts of Asia and Europe as well. In other policy-related developments, the Swiss National Bank cut rates; however, the RBA remained on the sidelines. Key labour market data in the US is out next week including September nonfarm payrolls and job openings for August, while Fed Chair Powell is also due to speak.  

A firmly on-hold RBA gave markets no sense at this week's meeting that it is concerned about policy divergence as central banks offshore continue to cut rates (reviewed here). The cash rate was maintained at 4.35%, a level unchanged back to November last year. Unlike in August, a hike was not considered on this occasion, but as Governor Bullock noted in the press conference strong labour market conditions - moderating job vacancies notwithstanding - mean near-term cuts remain off the table. In its decision statement, the Board retained the message that it needed to 'remain vigilant to upside risks to inflation' and that policy would stay 'sufficiently restrictive' until it gains greater confidence that inflation is on track to return to the 2-3% target 'sustainably'. 

The word 'sustainably' was added into the statement to emphasise the Board's focus on underlying inflation just as government rebates for household electricity bills are lowering headline inflation. Monthly data for August reported a fall in 12-month CPI from 3.5% to 2.7%, a 3-year low (reviewed here). Federal and state government rebates drove a 14.6% fall in electricity prices in the latest month following a 6.4% decline in July. Governor Bullock's press conference was prior to this release but it was made clear that the Board would not be cutting in response to falling inflation driven by these dynamics. That said the gauges of underlying inflation also softened in August to 3.1% (CPI ex-volatile items and travel) and 3.4% (trimmed mean), so this is at least progress in the right direction. In other news from the RBA, its half-yearly Financial Stability Review identified that households are weathering the effects from higher interest rates, but this would be at risk in the event of a sharper slowdown in the economy or if rates remained higher for a more extended period.   

In the US, Fed officials spoke after last week's decision to frontload the start of the easing cycle with a 50bps cut. The likes of Bostic, Goolsbee and Kashkari highlighted the need to dial back the tightness of monetary policy to guard against risks to the labour market. On inflation, the PCE price index softened from 2.5% to 2.2% at an annual rate in August, though the core index - the Fed's preferred measure - ticked up from 2.6% to 2.7%. For the core rate, however, the rise in the annual pace belies softer readings in recent months - the 3-month and 6-month annualised rates are at 2.1% and 2.4% respectively. It is this trend that saw the Fed pivot its focus away from inflation to the employment side of its mandate.      

Increasing risk of a hard landing in the euro area saw markets move to almost fully price in an October rate cut from the ECB. Economic activity contracted in September according to the latest flash PMI reading at 48.9 from 51.0 in August. While some of this decline can be attributed to a post-Olympics slowdown, cooling price pressures suggest the weakness runs deeper. The report noted that selling prices have fallen below a level consistent with the ECB's 2% inflation target, with services inflation slowing and goods prices falling. This was backed up by weaker-than-expected inflation reads in France (1.2%) and Spain (2.4%) ahead of figures for the euro area next week. 

Australian CPI 2.7% in August

Headline inflation in Australia slowed to a 3-year low in August as government rebates lowered household electricity bills. CPI on the monthly indicator fell from 3.5%yr in July to 2.7%yr in August, in line with expectations. The RBA made it clear at yesterday's meeting (see here) that it would not be moving to cut on these numbers, highlighting its focus on underlying inflation. There was at least some encouraging news here, with the underlying inflation gauges moving closer to the top of the RBA's 2-3% target band.

Markets had been anticipating a sharp fall in headline inflation in August and today's report did not disappoint. Prices fell 0.2% in the latest month, creating a base effect that saw 12-month inflation decline from 3.5% to 2.7% - a low back to August 2021. The main factor behind prices falling in August was Commonwealth and state government rebates driving a 14.6% decline in electricity prices. This was after a 6.4% fall in July during the early stages of the rebates. The ABS reported that without the rebates, electricity prices would have risen by 0.9% in July and 0.1% in August. 

Petrol prices continued to decline in August, another key factor behind the fall in inflation in August. Across the past year, petrol prices nationally are down by 7.6% - a vastly different situation to 12 months ago when prices had risen at a 13.9% pace. 

Although volatile items drove headline inflation lower, the underlying CPI measures also softened in August. CPI ex-volatile items and holiday travel slowed from 3.7% to 3.1% at an annual rate, and the trimmed mean eased from 3.8% to 3.4% - both measures at lows since early 2022. While welcomed, progress on lowering underlying inflation has been slow in 2024, a key reason for the RBA holding back from cutting rates as many of its peers offshore are doing.  

Key components in Australia's CPI basket that have contributed to sticky inflation are rents (6.8%), new home building costs (5.1%), insurance (6.2%) and health (5.3%). Progress will be needed across these areas to see the RBA moving into its easing cycle.    

RBA steady in September

The RBA left its key policy rates on hold at today's meeting (cash rate 4.35% and exchange settlement rate 4.25%). Inflation dynamics in Australia mean the RBA will be away slowly in cutting rates, now not likely to occur before February 2025 at the earliest. An RBA that will stay on the sidelines as the global easing cycle continues points to added support for the Australian dollar, something that Governor Bullock said today would be welcome from an inflationary perspective.  

Today's decision to remain on hold came across as having been straightforward for the Board. Key data since the August meeting did not surprise - Q2 GDP growth came in weak (1%Y/Y) and the labour market remained robust with solid employment gains and low unemployment (4.2%) - warranting little reason for a policy change. In the post-meeting press conference, Governor Bullock reiterated that rate cuts weren't on the radar for the Board, but neither did it consider a hike today - a mildly dovish tilt from August where a 25bps hike was discussed. This may explain the 11bps decline in the Australian 3-year bond yield to 3.45% in today's trade. 

The Board's decision statement repeated the same key themes that were highlighted at the previous meeting: inflation is proving persistent; the outlook is uncertain; and returning inflation to the 2-3% target band remains the priority. Continuing to assess that there is excess demand in the economy, the statement reaffirmed that the Board is 'vigilant to upside risks to inflation'. Accordingly, the guidance that policy needs to remain 'sufficiently restrictive' until the Board is assured inflation is on track to return to target is still intact. Moreover, Governor Bullock said that inflation needs to return to target 'sustainably'. CPI data for August tomorrow will likely show a sharp fall in headline inflation to 2.7%yr as energy rebates and other cost-of-living support measures kick in. However, the statement noted the Board's focus is on underlying inflation, which is not forecast to approach the midpoint of the band until 2026.   

Developments today have reaffirmed that the RBA is at a clear divergence from its central bank peers that have cut rates across the US, Europe, UK, Canada and New Zealand. Governor Bullock said this situation reflected several factors including that the RBA didn't raise rates by as much as other central banks; the domestic labour market has been more resilient than in other countries; and that disinflationary progress in Australia has been slower. As a result, the Board is content to preside over a policy divergence that will widen into year-end as other major central banks continue to cut rates. The next RBA meeting is on 4-5 November.   

Preview: RBA September Meeting

The monetary policy cycle in Australia is yet to turn and the RBA is likely to again push back on prospects for near-term rate cuts as it leaves the cash rate on hold (4.35%) at today's meeting in Sydney. Still awaiting greater control over inflation while also seeing a labour market that remains robust, the RBA is one of only 3 central banks in the G10 FX space not cutting rates. The global easing cycle has ramped up with the Federal Reserve delivering a frontloaded 50bps cut in the US last week, but the RBA is set to remain on the sidelines into year-end. 

Strong debate going into the previous meeting in August over whether the RBA would hike or hold was settled by the RBA maintaining the cash rate at 4.35%. Although a hike was considered, the Board concluded that holding rates struck a better balance at this stage of the cycle in terms of managing the risks to both sides of its mandate for inflation and employment. Recall that the strategy the RBA has said it is pursuing is to bring inflation down to the 2-3% target range with employment continuing to increase. With the cash rate having now been on hold since last November, the RBA has a good sense of the effects of its monetary tightening - GDP growth is weak (1%Y/Y in Q2) and tightness in the labour market has eased - but Governor Bullock has said repeatedly that slow progress on inflation means that rate cuts are out of the question. 

Accordingly, the key themes at today's meeting are likely to remain on the same lines as in August. Expect the Board to reaffirm that it needs to 'remain vigilant to upside risks to inflation' and that it will keep monetary policy 'sufficiently restrictive' until greater confidence that inflation is on track to return to the target range is gained. This continued focus on inflation comes with the recent labour market data backing up the RBA's assessment that conditions remain tight relative to full employment. Strength in employment has kept the unemployment rate low at 4.2% amid record high labour force participation (67.1%). 

On the markets, there is scope for a hawkish repricing today on further RBA pushback. In alignment with the declines in global bond yields as central banks offshore have moved to cut rates, the key 3-year Australian bond yield has fallen significantly over the past couple of months to trade around 75bps through the cash rate. That is probably enough of a discount given the RBA has made it clear they will be patient in moving into their easing cycle. This could provide additional support to the Australian dollar, which according to the RBA's trade-weighted index has lifted by more than 2.5% since the August meeting. 

Macro (Re)view (20/9) | Fed commences easing cycle

Markets repriced after a line-ball decision between a 25 or 50bps rate cut from the Fed went the way of a more frontloaded start to the easing cycle in the US. Equities ended the week higher and the US dollar declined against most majors excluding the Yen as the Bank of Japan left rates unchanged. With the easing cycle underway, the initial move has been a steeper treasury curve led by the long end. The 2-year segment ended the week essentially flat, with the Fed's signalling of a substantial amount of policy easing ahead playing catch-up to markets. 

Fed goes big to start easing cycle  

A frontloaded start to the Fed's easing cycle with a 50bps rate cut to 4.75-5.0% signals the FOMC's intent to avoid falling behind the curve with a soft landing for the US economy on the line. Backed by sufficient confidence that inflation is on track to return to target, addressing rising risks to the labour market is now the focus for the FOMC. This week's decision formalised this policy pivot, communicated intially at the recent Jackson Hole Symposium. At the post-meeting press conference, Chair Powell said these were the first steps in a recalibration of monetary policy away from restrictive settings to a more neutral level for interest rates. 

The nuance in the press conference revolved around Chair Powell making the case that starting the easing cycle with a larger 50bps cut instead of a conventional 25bps move did not mean alarm bells were ringing at the Fed. However, FOMC members are on the same page that a material easing cycle will be needed for a soft landing not be be derailed. The updated set of economic projections has kept the outlook for economic growth at 2% across the forecast horizon, but that is conditioned on a more aggressive easing cycle than previously anticipated. An additional 50bps of cuts is seen by year-end to 4.4%, down from 5.1% previously. This is then followed by 100bps of cuts in 2025, taking the Fed funds rate to 3.4% compared to 4.1% projected in June before rates eventually fall further in 2026 (2.9%).

This dovish reassessment of the rates outlook was in response to an uplift in forecasts for the unemployment rate, with risks seen to the upside. Unemployment is now expected to reach 4.4% later this year (from 4.0% previously) and hold at that level through 2025 (from 4.2%). Due to the cooling labour market, the inflation forecasts for both headline and core PCE prices were trimmed to 2.3% and 2.6% respectively this year and 2.1% and 2.2% in 2025, highlighting how the balance of risks has swung in the US.  

BoE holds rates steady  

This week's Bank of England meeting was largely a non-event for markets as rates were left unchanged at 5.0% in an 8-1 decision from the Monetary Policy Committee (MPC). Meanwhile, the MPC announced a target of £100bn for balance sheet reduction over the next 12 months, a continuation of the status quo.  

After commencing its easing cycle only last month, the MPC's decision statement noted that it is taking a 'gradual approach to removing policy restraint'. Notably, there remains caution around easing too quickly given that inflation risks have not yet been contained, particularly in relation to services prices. Depending on how economic conditions and the labour market evolves, there is a range of scenarios the MPC is looking at in terms of how long restrictive rates will be required. As set out in the August Monetary Policy Report, the MPC's baseline outlook is that lower inflation will filter through to price- and wage-setting processes, allowing for rates to be reduced over the next couple of years.  

Strong Australian labour market to keep the RBA on hold   

Another solid update on the Australian labour market should keep the RBA quiet at next week's meeting, with rates to stay on hold around its pushback to near-term rate cuts. Employment exceeded expectations for the 5th month in succession rising by 47.5k in August (vs 26k forecast), now up by more than 300k in 2024 (reviewed here). The resilience of employment to slower economic growth helped the unemployment rate print at an unchanged 4.2% as labour force participation remained at a record high of 67.1%. Overall, the report was consistent with the RBA's view that the labour market is seeing some rebalancing but still remains strong. This will likely keep the RBA's focus on the inflation side of its mandate at next week's meeting. 

Australian employment 47.5k in August; unemployment rate 4.2%

Australian employment surpassed expectations for the 5th month on end in August rising by 47.5k against the 26k consensus. The national unemployment rate held at 4.2% with labour force participation remaining at record highs (67.1%). The continuation of resilient labour market conditions should see the RBA retain its place as a hawkish outlier to its G10 peers in actively pushing back against near-term rate cuts. 

By the numbers | August

• Employment increased (on net) by 47.5k (full time -3.1k, part time 50.6k) in August, above the consensus forecast for 26k. However, downward revisions lowered employment by 14.9k over June and July. 
• Australia's unemployment rate was unchanged at 4.2% (as expected), but the broader underemployment rate lifted from 6.3% to 6.5%. Labour force underutilisation remained at 10.6%, little changed over recent months. 

• Labour force participation held at record highs printing at 67.1%. 

• Hours worked were up 0.4% in the month - matching their gain in July - to be up by 1.7% over the year.

The details | August

Employment continued its run of strong gains rising by a further 47.5k in August to by up by a little more than 310k year to date. Notwithstanding a series of downward revisions to prior months, this is still a considerable increase amid the slowdown in economic growth. Additionally, more than 3/4 of the increase in employment in 2024 has been driven by full time employment, putting the modest decline in August (-3.1k) in context. Part time employment (50.6k) saw its strongest rise in 12 months to drive the headline outcome in August. To highlight the strength of the momentum in the labour market, employment gains averaged 47.7k for the 3 months to August - its fastest since May last year, an annualised pace of more than 4%.  

With the participation rate remaining steady at record highs (67.1%), August's rise in employment was strong enough to hold the unemployment rate at 4.2%. The unemployment rate is up from cycle lows of 3.5% but remains at low levels - as does underemployment (6.5%) and total underutilisation (10.6%). 

A 0.4% rise in hours worked came through in August, its 3rd consecutive monthly rise. Despite the decline in full time employment, hours worked by that segment still advanced by 0.2%. Meanwhile, part time hours were up 1.6% - its strongest rise since November 2022 - outpacing the lift in employment (1.1%). Base effects saw annual growth in hours worked accelerate from 0.5% to 1.7%. A considerable divergence remains in place between annual growth in hours worked in the full time (1.0%) and part time segments (5.0%) - a sign of adjustment in the labour market to weaker demand conditions. 

In summary | August 

The August report was consistent with the continuation of robust labour market conditions, remaining resilient to slower economic growth. As highlighted in a recent speech by RBA Assistant Governor Hunter, labour market conditions are assessed as tight relative to full employment. There is nothing in today's report to change that view, meaning the RBA's focus will likely remain on the inflation side of its mandate, pushing back on the prospect of a rate cut into year-end. 

Preview: Labour Force Survey — August

Australia's Labour Force Survey for August is due to be published by the ABS this morning (11:30am AEST). Strong employment outcomes continued into the second half of the year as the 4th consecutive upside surprise on expectations came through in July. The unemployment rate, however, lifted to 4.2% - its highest since early 2022 - as participation reached a new peak (67.1%), broadly reflecting the labour market rebalancing from cycle tights. The RBA has continued to push back on prospects for a rate cut by year-end, remaining more focused on the inflation side of its mandate. 

July recap: Employment gains extend but unemployment rises  

Employment increased by a net 58.2k in July (full time 60.5k/part time -2.3k), surprising to the upside of consensus (20k) for the 4th month in succession. This run of increases has seen employment rise by 188.2k, with 3/4 of the gain coming in the full time segment.   

Strength in employment has gone hand in hand with growth in the working-age population, a support to demand as economic growth has slowed over the past year or so. It has also boosted labour supply, evidenced by the participation rate climbing from 66.9% to 67.1% in July - a new record high. With this, the labour market continues to rebalance, the unemployment rate now at 4.2% compared to the cycle lows of 3.5% in late 2022. Underemployment (6.3%) and total underutilsation (10.5%) have also risen but remain low by historical standards. 

Hours worked lifted in June (0.3%) and July (0.4%) but growth has been subdued over the past year (0.9%) as firms have responded to a softer demand environment. During the cooler months, the ABS has been highlighting the impact of illness-related absences on hours worked. In each of the past 3 months, more than 4% of employed people have reported working fewer hours than usual due to illness. This is up from a pre-Covid average of around 3.5% over the 5 years prior to the pandemic. 

August preview: Employment gains expected to moderate     

Markets continue to expect a moderation in employment, with the median estimate going into today's report at 25k (range: 10k to 56.6k). The recent run of upside surprises for employment has seen the median forecast shift up modestly from 20k for each of the past 4 reports. No change is expected in the unemployment rate from its current level of 4.2% (range: 4.1% to 4.3%), though an outcome either side of consensus could easily occur on any movement in the participation rate.

Aside from August's numbers, the broader picture remains around the evolution of the labour market. A recent speech from RBA Assistant Governor Hunter outlined that although conditions have eased, the labour market remains tight relative to its assessment of full employment. The RBA's outlook is for the labour market to gradually rebalance, coming mainly via a reduction in job vacancies and hours worked. This caps the forecast peak in the unemployment rate at 4.4% by mid-2025. Signs that conditions are deteriorating more rapidly would see more of the Board's focus turn to the employment side of its mandate, but for now it is clearly more focused on restoring 2-3% inflation.

Macro (Re)view (13/9) | Fed decision to go down to the wire

Equities rallied back from last week's declines, while lower US yields ahead of the start of the Fed's easing cycle at next week's meeting weighed on the dollar. Markets leaning towards a 50bps cut sent the benchmark 2-year Treasury yield to lows since mid-2022, with further downside in prospect in the event of a dovish Fed meeting. Other events of note next week include policy meetings for the BoJ (Fri) and BoE (Thu); US retail sales (Tue); inflation data in the UK and euro area (Wed); and Australia's monthly labour force report (Thu). 

Odds back in favour of a 50bps Fed cut 

The debate over whether the Fed will commence its easing cycle with either a 25 or a 50bps cut is set to continue all the way until the decision is handed down next week. Markets have swung back and forth as the incoming data has failed to give a clear steer. CPI data for August came in on consensus for the headline measure at 0.2%m/m and 2.5%y/y, down from 2.9%y/y previously, but a slight upside surprise for core inflation in the month at 0.3% (vs 0.2%) left the annual pace steady at 3.2%. This saw markets repricing for a 25bps cut; however, by the end of the week, the odds were back in favour of a 50bps move.  

Dovish bets were reinvigorated by media commentary and reports amid the Fed's pre-meeting blackout period. Influential former NY Fed President Dudley said he saw the case for a 50bps cut, while an article from the WSJ's top Fed watcher Timiraos outlined that the 25 vs 50bps debate was still very much live. My own view is that the developments the Fed has seen in the labour market of late, with rising unemployment and downward revisions to employment growth will lead the Fed to cut by 50bps.    

ECB cuts but remains cautious 

The ECB's decision to cut its key policy rate by 25bps to 3.5% had been fully discounted by markets going into this week's meeting. With growth slowing and inflation remaining on track to return to target in the back half of next year, the Governing Council continued the process of 'moderating the degree of monetary policy restriction'. Larger cuts (60bps) will go through to the ECB's other rates: Marginal Lending Facility to 3.9% and Main Refinancing Operations to 3.65%, changes that stem from a review tabled earlier in the year that recommended the ECB's corridor system of rates operate with narrower spreads (15bps from 50bps), effective from September.   

This was the second cut of the cycle and President Lagarde said during the post-meeting press conference that policy is 'pretty obviously (on) a declining path'. New staff projections retained the outlook for headline inflation to fall to 2.5% this year, 2.2% in 2025 and 1.9% in 2026; however, progress on core inflation was seen as less convincing due to services prices surprising on the upside recently. Those forecasts were revised up to 2.9% in 2024 (from 2.8%) and 2.3% in 2025 (from 2.2%). That leaves the Governing Council conveying an underlying sense of caution on the pace of rate cuts, reiterating a data-dependent stance and decisions being taken on a meeting-by-meeting basis. 

Market pricing leans towards another two rate cuts by year-end, a scenario that to be met would require the ECB to ease more aggressively than it has so far. That is not out of the question given downgrades to the growth outlook were made across the projection horizon: 0.8% in 2024 (from 0.9%), 1.3% in 2025 (from 1.4%) and 1.5% in 2026 (from 1.6%). Meanwhile, a Bloomberg article quoting ECB sources indicated a rate cut in October was not being ruled out. 

Inflation still the main game for the RBA 

Insights on the Australian labour market in a speech from the RBA's Assistant Governor Hunter implied that inflation remains of much greater concern - a contrasting scenario to many of its central bank peers. Suggesting as much, Hunter highlighted that the labour market - though rebalancing - is still tight relative to the RBA's assessment of full employment, and the overall resilience of conditions amid the economic slowdown had surprised. The RBA forecasts the unemployment rate (4.2% as of July) to edge up to a peak of 4.4% over the coming year. As Hunter explained, a key part of that assessment is the view that vacancies can moderate from elevated levels to prevent a steeper rise in unemployment. While the RBA is wary of a more pessimistic scenario unfolding, it will need to see this emerging in the data - starting with next week's August labour force survey - to shift more of the policy focus to the employment side of the mandate. 

There was a potential warning light on this front as households highlighted some increased concern around the labour market in the Westpac-Melbourne Institute Index September report. This contributed to an easing of consumer sentiment (-0.5%) in the month, with the index (84.6) remaining in its deeply pessimistic range of the past couple of years. Meanwhile, the NAB Business Survey reported a softening in trading conditions and a weakening in confidence in August, both indicative of the subdued growth backdrop reported in last week's National Accounts for the June quarter.        

Macro (Re)view (6/9) | All options on the table for the Fed

Growth concerns returned this week to hit equity markets in a repeat of the episode from August. A lacklustre nonfarm payrolls in the US has left the door open for a frontloaded start to the cutting cycle from the Federal Reserve, driving a bear steeping of the Treasury curve on a sharp move lower in the 2-year benchmark yield. Rate cuts are the order of the day for global central banks, with the Bank of Canada easing by a further 25bps and the ECB expected to follow suit next week. By contrast, the RBA continues to remain hawkish.  

August payrolls fail to resolve the 25 or 50bps debate... 

Markets remain divided over whether the Fed will commence its easing cycle with a 25 or 50bps cut at the upcoming meeting on 17-18 September. The keenly awaited August report showed nonfarm payrolls increased by 142k, coming in light relative to the expected figure of 165k while revisions deducted a net 86k from employment over June and July. Although this raised unease that slowing employment reflects weakening growth, the unemployment rate fell back to 4.2% from 4.3% in the prior month as the participation rate remained at an unchanged 62.7%. Speaking post the payrolls release, Fed officials including Governor Waller and NY Fed President Williams endorsed the need to start cutting rates but gave no clear signs that a frontloaded 50bps cut was on the cards. 

.... while the ECB prepares to cut again

The ECB goes into next week's meeting with markets priced for a 25bps rate cut to be delivered by the Governing Council. Last week's inflation data provided the green light for the ECB to continue winding back restrictive policy following the initial cut in June, with headline inflation slowing to a 3-year low at 2.2%yr in August and the core rate easing to a slightly more elevated 2.8%yr pace. New forecasts to be published at next week's meeting will give the ECB the chance to update markets on its outlook for inflation and how it sees the path for rates evolving.   

No pivot from the RBA despite slow growth  

RBA Governor Bullock continued to push back against prospects for rate cuts in the near term as the effects of restrictive monetary policy saw Australian growth slow further in Q2. Real GDP growth came in at 0.2% in the June quarter, easing growth through the year to 1% - its slowest pace outside the pandemic period since the aftermath of the early 1990s downturn. The higher cost of living and increased mortgage repayments saw households reducing consumption in the quarter (-0.2%), most notably in discretionary categories (-1.1%). 

With finances squeezed, the household saving ratio remained at 0.6%, implying that over the first half of the year, households had been spending nearly all of their disposable income to meet their expenses. In addition to the decline in household consumption, weak outcomes for residential construction (0.1%q/q) and business investment (0.1%q/q) indicated that higher interest rates were weighing on the economy more broadly. Continued strength in public demand (0.8%q/q, 3.4%Y/Y) is playing a key role in providing countercyclical support to growth as private demand has slowed materially (0%q/q, 0.8%Y/Y). For more on Australia's Q2 GDP growth outcome, please see my In review feature article here with in-depth analysis and charts from the national accounts release. 

Speaking this week, Governor Bullock outlined that while the Board is still aiming to steer the economy along the narrow path - gradually returning inflation to the 2-3% target range while preserving the labour market - its focus remains on the inflation side of its mandate. Accordingly, Governor Bullock reaffirmed that the Board does not see the case to cut rates by year-end as is currently priced into markets. Until the RBA is confident that inflation is on track to return to target on a sustainable basis, Governor Bullock said that restrictive policy will be maintained. In other local developments this week, dwelling approvals rose by 10.4% in July (see here); housing finance accelerated by 3.9% (see here); and the trade surplus widened to $6bn (see here).

Australian housing finance advances further in July

Australian housing finance lifted for the 6th consecutive month rising by a stronger-than-expected 3.9% in July (vs 1% forecast). Investor lending drove the headline increase with a 5.4% lift while owner-occupier commitments were up by 2.9%. Commitments have surged since early 2023 reflecting strong underlying demand for housing due to population growth and rising housing prices. Earlier in the week, CoreLogic reported that the national median housing price increased by 7.1% over the year to August rising through $800k. 

Housing finance commitments accelerated by 3.9% in July, rising to their highest level ($30.6bn) in 25 months. Over the past year, commitments have risen in value by 26.5% and are up 31.5% on the cycle low in January 2023 ($23.3bn). 

The owner-occupier segment saw lending commitments rise by 2.9% in the latest month to $18.9bn, an increase of 21.4% on a year ago. Within the segment, commitments to 'upgraders' (existing home owners) advanced by 4.1%; first home buyers edged up 0.8%; while construction-related lending was broadly flat (0.2%) as a rise in commitments to purchase newly finished dwellings (5.8%) was offset by a fall in lending for new home building (-3.2%). 

Details around underlying loan volumes were mixed, rising for upgraders (3%) and first home buyers (0.8%) but declining for construction-related purposes (-1.2%). 

Investor commitments saw a 5.4% rise come through in July bringing the level to $11.7bn - a touch below the record high from January 2022 ($11.8bn). From that peak, commitments went on to fall sharply through 2022 alongside the RBA's hiking cycle; however, the subsequent rebound has almost been as rapid - despite the cash rate having risen by 425bps. 

Australia's trade surplus widens to $6bn in July

Australia's trade surplus widened to $6bn in July - its highest level in 5 months - on the back of a rise in exports (0.7%) and softer imports (-0.8%). The July result defied expectations for a narrowing in the monthly surplus to $5bn from a downwardly revised $5.4bn in June. 

July's trade surplus came in at $6bn, up from $5.4bn in June but remains around its recent lows. Throughout 2024, the trade surplus has narrowed materially as lower commodity prices have weighed on export revenue, while import spending - boosted by inflation - has risen. For the 3 months to July, the trade surplus averaged $5.5bn, just above the $5bn low in May. 

Export revenue increased for the third month running with a 0.7% lift coming through in July to $43.8bn (-1.4%yr). The main driver was a 6% lift in rural goods - adding to June's 7.5% gain - as exports of meat (4.2%) and other rural products (12.4%) advanced. This was partially offset by an easing in non-rural goods (-0.4%) with exports of coal (-1.7%) and LNG (-4.5%) hit by lower prices. Iron ore exports (0.3%) were broadly flat in the month. 

Import spending weakened by 0.8% in July, declining for the first time since April to come in at $37.8bn (3.0%yr). This result was driven by a 3.7% fall in intermediate goods as the value of fuel imports slumped 7.6% alongside lower oil prices. This weakness was moderated by gains in consumption goods (1.6%) and capital goods (1.6%).