Macro (Re)view (22/8) | Fed pivot opens September cut

The Jackson Hole Symposium looks to have again delivered a policy pivot, with the Fed poised to recommence its easing cycle. The Fed has maintained a patient and cautious approach throughout 2025 that has seen rates left on hold. That stance was reiterated just days earlier in the minutes of the Fed's July meeting. With tariffs only just starting to flow through to prices, the Fed was clearly hesitant to cut, holding firm against political pressure. However, the weak payrolls report for July appears to have driven a reappraisal. In his keynote speech, Fed Chair Powell highlighted a 'shifting balance of risks' in the US economy, with the labour market starting to raise concerns despite tariffs posing inflationary risks, 'may warrant adjusting our policy stance'. Markets interpreted that as guiding towards a 25bps cut in September, with a total of 2-3 cuts by year-end being worked into calculations. Treasury yields and the US dollar were taken lower on Friday while US equity markets rallied, largely reversing declines from earlier in the week.  

With Chair Powell signaling the labour market demands more attention going forward, markets have run with the idea that the Fed will need to recommence removing policy restriction. The 3-month average for payrolls has slowed to just 35k after large downward revisions were made to the gains in May and June, while the 73k rise in July - also subject to revision - underwhelmed expectations (106k). The unemployment rate is low but pushed up from 4.1% to 4.2% in July. Tariffs look like having a gradual influence on prices. As reported last week, CPI inflation for the moment is relatively contained in and around 3%, but is still elevated to the Fed's 2% target. Meanwhile, producer prices (3.3%) are starting to accelerate, pointing to pressures in the pipeline if firms start to pass on higher costs due to tariffs rather than fully the increase in their margins. As Chair Powell noted with inflation risks skewed to the upside and downside risks to employment, the Fed is confronting a 'challenging situation', let alone the external pressure.     

UK inflation data was stronger than expected in July; however, pricing for an additional 50bps of BoE rate cuts has remained broadly intact. Headline CPI rose 3.8%yr in July, coming in firm relative to the 3.7% pace expected and up from 3.6% previously. Core CPI also printed at 3.8%yr, up from 3.7% prior against expectations to hold steady. Services prices - the key area of the inflation basket under the BoE's scrutiny - backed up to a 5%yr pace from 4.7% in June, its highest since April. An unusually large rise in airfares (30.2%) in the month - the fastest rise since 2001 - was a key driver of higher inflation in July, allowing markets to remain sanguine on the data. The SONIA curve continues to point to the BoE's easing cycle taking Bank Rate down to 3.5% from its current 4% level, with a 25bps cut still seen as likely to come at the November meeting. Expectations for further easing reflect a softening labour market and a weak growth backdrop. 

   

In Europe, August's PMI readings indicated activity was continuing to hold up despite its export-oriented economy facing the new tariff regime imposed by the US. The key reading at 51.1 for the composite gauge indicated a slight pick-up in momentum from July (50.9), while manufacturing activity also improved (49.8 to 50.5). More details of the trade agreement struck between the US and the EU came to light this week. The deal leaves most European goods exported to the US facing tariffs in the order of 12-16%. Speaking during the week, ECB President Lagarde said the deal was somewhat better than the more severe outcome of 20%+ tariffs assumed in the ECB's economic forecasts. But uncertainty remains prevalent, especially around key goods (pharmaceuticals and semiconductors), and the ECB expects growth to slow.

Macro (Re)view (18/8) | Calm descends

Low cross-asset volatility driven by a view that tariff-driven inflation will not stand in the way of Fed rate cuts saw high-flying equities make further gains this week. On the back of US CPI data - despite being above the Fed's target - traders are weighing up 2-3 rate cuts before year-end. As a result, the 2-year Treasury yield touched lows since May seen in the aftermath of Liberation Day during the week. The US dollar declined, though the Australian dollar was weaker following a dovish rate cut from the RBA. 

A Fed rate cut in response to labour market concerns firmed to a near lock in market pricing at the September meeting, with signs of tariff-driven inflation remaining inconclusive. Key inflation outcomes in July were on expectations at 0.2%m/m for headline CPI and 0.3%m/m on a core (ex-food and energy) basis. In annual terms, headline CPI held at 2.7% - a touch below the 2.8% consensus - while core CPI lifted from 2.9% to 3.1%, surprising to the upside (3%). Components exposed to tariffs (including appliances, furniture etc) showed limited signs of price rises, up 0.2%m/m. The annual pace firmed from 0.4% to 0.7%, a subdued pace but a contrast nonetheless on 12 months ago when core goods were pushing down on inflation (-0.6%). 

Although consumer prices are yet to show the clear effects of tariffs, those pressures look to be building in the pipeline. Producer prices rose well above expectations from 2.3% to 3.3%yr (vs 2.5% exp), raising the likelihood that firms facing higher costs will start passing this through via price increases in order to preserve margins. The Fed does expect this process to play out, but it shouldn't overly hinder easing prospects, at least in the near term due to its view that tariffs are unlikely to spark a broader inflationary episode. 

Over in the UK, further signs of weakness in the labour market were seen with payrolled employment falling for the 8th time in the past 9 months, down this time by 8k in July. The unemployment rate held at 4.7%. Much of the weakness in the labour market is being attributed to the government's increase in payroll tax and by a larger-than-usual rise in the minimum wage. Labour market conditions are likely to keep the BoE easing cycle rolling into next year. On a more positive note, June quarter GDP growth surprised to the upside at 0.3%q/q (1.2%Y/Y).     

The RBA's decision to cut the cash rate by 25bps to 3.6% was expected, but the overall tone was a bit more dovish than anticipated (see here). Market pricing for the continuation of the easing cycle to a terminal cash rate in and around 3% was given soft validation by the RBA's new forecasts in the August Statement on Monetary Policy. Based on that market pricing for the cash rate, the RBA's revised forecasts have inflation holding around the midpoint of the 2-3% target and the unemployment rate remaining in the low 4s across the projections, an outlook consistent with both sides of its policy mandate. This was the main story from the RBA this week, despite questioning in the press conference focusing on a reduction in the central bank's assumption for productivity growth. 

Australian data this week also helped shore up pricing for further rate cuts. Employment matched expectations rising by 24.5k in July, seeing the unemployment rate fall back to 4.2% after it had risen to a 3½-year high in June (4.3%). The report steadied the ship after the labour market looked to be softening more rapidly than expected through May and June (see here). Meanwhile, wages growth also matched expectations at 0.8%q/q, 3.4%Y/Y in the June quarter, a pace in the RBA's comfort zone (see here). In other news, housing finance showed signs of heating up posting a 2% rise in the June quarter (see here). 

Australian employment 24.5k in July; unemployment rate 4.2%

An improved reading on Australian labour market conditions saw employment rising in line with expectations by 25k in July. The unemployment rate fell to 4.2% after hitting a 3½-year high in June of 4.3%. There was minimal reaction in markets, with the report only shoring up expectations that further rate cuts are on the table, as RBA Governor Bullock indicated following the 25bps cut announced on Tuesday.  

By the numbers | July

• Employment lifted by a net 24.5k in July, all but matching the 25k consensus after a 1k rise in June (revised from 2k). Full time employment (60.5k) surged by its most since February last year, but part time employment fell (-35.9k).   
• The unemployment rate fell from 4.3% to 4.2%, in line with expectations. Declines were also seen in underemployment (6% to 5.9%) and total underutilisation (10.3% to 10.1%). 
• Labour force participation came in at 67.0%, unchanged after a downward revision was made to the 67.1% figure initially reported for June. Rounding saw the employment to population ratio rise from 64.1% to 64.2%.  
• Hours worked rose by 0.3% month-on-month in July, partially rebounding from a 0.9% fall in June. After revisions, annual growth remained at 2.1%. 

The details | July

Employment posted its best result in 3 months rising by 24.5k in July (0.2%), an outcome that steadies the ship after the disappointing figures for May (-3k) and June (1k). The gain was driven entirely by a 60.5k increase in full time employment (0.6%), the strongest gain by the segment in 17 months. This was partially offset by a 35.9k fall in part time employment (-0.8%), its 4th monthly decline this year. Due to the earlier weakness, employment gains over the past 3 months averaged just 7.5k - well below its 20-40k range through most of last year. 

Following the pick up in employment and helped by the participation rate holding at 67% - a lower level than earlier reported for June - the national unemployment rate fell to 4.2% from 4.3%. Recall, the unemployment rate shocked markets after rising from 4.1% to 4.3% in June, its highest level since November 2021. This was a factor in the RBA's decision to cut the cash rate by 25bps earlier this week, though the RBA still saw the labour market as tight. The partial reversal of the increase in the unemployment rate was also backed up by falls in the underemployment rate from 6% to 5.9% and in total underutilisation from 10.3% to 10.1%.    

Hours worked rose by 0.3% in July, a positive result on the surface but a little underwhelming coming on the back of the sharpest fall in more than 2 years in June (-0.9%). Growth in hours worked was 2.1% over the 12 months to July, an unchanged pace from June. Reflecting the employment outcomes, full time hours increased by 0.7% (2.3%yr) while part time hours fell by 1.5% (1.1%yr). 

In summary | July  

Today's report was welcome after the data for May and June had raised concerns that the labour market was cooling at a faster pace than previously thought. There is still a lot of choppiness in the jobs figures in particular, so rushing to conclusions - in either direction - would be unwise. The decline in the unemployment rate to 4.2% is the main story today. Overall, this is indicative of a labour market that remains in fairly robust shape; however, as the RBA noted in its decision on Tuesday, further rate cuts are likely to be needed to keep it ticking along. 

Preview: Labour Force Survey — July

Australia's monthly read on the labour force is due to be published this morning (1130 AEST), today's report covering July. The unemployment rate ended a 5-month stretch at 4.1% rising to 4.3% last time out after employment growth effectively came to a standstill over May and June. The RBA continues to assess the labour market as tight, but signs of easing played a role in its decision to cut the cash rate by 25bps to 3.6% earlier this week. In its updated outlook, the RBA retained its forecasts for the unemployment rate, which it expects to rise no higher than its current level on a sustained basis, based on further cuts to the cash rate. Markets are pricing in at least an additional 50bps of easing. 

July preview: Can employment rebound? 

Employment gains have largely dried up after back-to-back months of disappointing outcomes, but a rebound of 25k is expected to be reported today for July. The range of forecasts sits between 15-50k, once again remaining wide reflecting the elevated volatility in the monthly employment series over recent times.  

On the basis of the expected rebound in employment, markets look for the unemployment rate to fall back to 4.2% in July from its current level of 4.3% (range: 4.2-4.4%). Because labour force participation is elevated near record highs at 67.1% - assuming that holds today - a solid to strong employment outcome will be needed to push the unemployment rate down again.    

June recap: Unemployment rate rises to its highest since late 2021  

The June Labour Force Survey delivered a shock as employment failed to meet expectations for the second month running, lifting the unemployment rate to a 3½-year high. Employment rose by just 2k on net in June (full time -38.2k/part time 40.2k) - well below the 20k rise forecast - after falling by 1.1k in May. While employment effectively went nowhere in May and June, it still rose by a fairly robust 86.4k (0.6%) across the quarter due to a strong figure in April (85.5k).   

Stalling employment growth alongside an increase in labour force participation to 67.1% (from 67%) saw the unemployment rate rise for the first time since the beginning of the year. Headline unemployment lifted from 4.1% to 4.3% in June to stand at its highest since November 2021. In addition, underemployment rose from 5.9% to 6%, driving total underutilisation 0.3ppt higher to 10.3%. 

Rounding out a weak report, hours worked declined by 0.9% in June, slowing annual growth from 3.1% to 1.8%. The weakness centred in full time hours (-1.3%), with part time hours rising (0.8%). Hours worked in the June quarter lifted by a modest 0.4%.

Australian housing finance rises 2% in Q2

Conditions in the Australian housing market warmed in the June quarter, with lending commitments rising by 2% to $87.7bn on a 1.9% lift in underlying loan volumes to 130k, their first increase since the September quarter last year. Increased activity follows the RBA commencing its easing cycle back in February this year, the Board going on to cut rates twice more since - including at yesterday's meeting (see here). Both the owner-occupier and investor segments of the market contributed to the uplift in the quarter. 

Lending commitments saw their fastest rise in the June quarter (2%) since Q3 last year, lifting the total value of lending to its highest level in more than 3 years at $87.7bn. The headline gain was driven by the owner-occupier segment, with lending rising 2.4% in the quarter to $54.7bn - more than rebounding from a 1.8% fall in the prior quarter. Within the segment, lending picked up across upgraders (non-first home buyers) (4.4%) and first home buyers (5.7%), both posting their strongest outcomes in a year. The investor segment played a supporting role seeing commitments rise 1.4% to $32.9bn. This followed declines of 0.1% and 2.6% in the previous two quarters. 

Turning to loan volumes, the total number of mortgages written rose 1.9% in the June quarter to 130k. But this outcome comes after a combined fall of 3.4% over the previous two quarters. At the peak of the cycle in the pandemic, volumes hit a high of 157k in consecutive quarters in mid 2021. Loan growth was driven by the investor segment, up 3.5% to 49.1k, albeit not recovering the declines from Q1 (-3.2%) and Q4 (-4.1%). Owner-occupier approvals have swung from quarter since unwinding from its pandemic highs. In the latest quarter, the segment saw a 0.9% rise in approvals to 80.9k, little changed on 12 months ago (-0.2%). 

Australian Q2 Wage Price Index 0.8%; 3.4%yr

Australian wages growth matched market expectations rising by 0.8% in the June quarter, leaving the annual pace at an unchanged at 3.4%. These outcomes are in line with RBA forecasts and come after yesterday's decision by the Monetary Policy Board to cut the cash rate by 25bps to 3.6%. Despite the RBA lowering its assumption for the rate of productivity growth in its latest forecasts, its concerns over the inflationary impact of wages growth have declined. At the current pace, wages growth remains in the comfort zone for the RBA, consistent with 2-3% inflation. Signs of softening in that have emerged in the labour market only increase that comfort.   

The Wage Price Index (WPI), a key indicator of wage inflation in the Australian labour market, tracks the movement in base wages across a fixed basket of jobs. For the June quarter, the WPI rose by 0.8%, down a tick from its pace in Q1 (0.9%) but in line with expectations going into the report. Annual growth in wages held at 3.4%, cooling noticeably from its peak of 4.2% a little over a year ago. The annual pace aligns with the more recent momentum in the WPI in 3- and 6-month annualised terms of 3.4% and 3.5% respectively. 

The underlying drivers of wages growth went quiet in the June quarter, something of an in-between period coming after new state-based enterprise bargaining agreements (EBAs) boosted wages growth in the March quarter but before the Fair Work Commision's 3.5% increase to the minimum wage and awards takes effect in the September quarter. 

In the private sector, wages growth was 0.8% in the latest quarter compared to 0.9% for the March quarter. The annual pace rose slightly from 3.3% to 3.4%. At the peak, wages growth in the sector was running north of 4% at a 15-year highs. Since late 2023, private sector wages growth has been cooling in a slowing inflationary environment, and as tightness in the labour market has eased.   

Wages growth in the private sector tends to be more responsive to the overall balance of conditions in the labour market than the public sector. Accordingly, the average pay increase in the private sector has slowed from peak of 5.8% in Q3 2023 to 3.9% currently. Meanwhile, just 12% of private sector jobs saw a wage change in the June quarter, with the bulk of annual reviews typically coming in the September quarter.  

Public sector wages growth lifted by 1% for the June quarter off the back of a 1.1% rise in the previous quarter. The slightly faster pace of wages growth in the sector likely reflects the on going effects of the recently implemented EBAs in New South Wales, Victoria, and Western Australia. Some 20% of jobs saw a wage rise this quarter. Annual wages growth is running at 3.7%, up slightly from the March quarter (3.6%) but down from the highs of 4.3% in late 2023. The average pay increase was 3.5%.  

Using the latest industry data, my estimates of wages growth for broad sectors of the labour market remain well down from their recent highs. Wages growth appears to have troughed in business services, but still looks to be easing in the mining and good-related sectors. Household services has seen a recent pick up, but that has been driven by the federal government's wage reforms in the child care and aged care sectors.  

Preview: Wage Price Index Q2

Australia's Wage Price Index (WPI) for the June quarter (Q2) is due to be published by the ABS at 1130 AEST today. This is the main indicator of wage inflation in the domestic labour market and is driven by changes in workplace agreements and awards as well as the overall balance of conditions between supply and demand. Wages growth has been tracking in the 3% range for much of the past year, a pace broadly consistent with the RBA's 2-3% inflation target. New forecasts published by the RBA yesterday essentially left the outlook for wages growth unchanged at 3.3% this year and 2.9% next year.      

June quarter preview: WPI 0.8%q/q, 3.3%Y/Y the expected outcomes  

In today's report, wages growth is expected to come in at 0.8% in the June quarter (range: 0.8-1.0%), which would see the annual pace ease from 3.4% to 3.3%. This is largely expected to be a quieter quarter for wages growth. In the March quarter, new Enterprise Bargaining Agreements (EBAs) came into effect, boosting public sector wages growth in several states. Meanwhile, the Fair Work Commission's ruling of a 3.5% increase to the minimum wage and award rates applies from the start of the next quarter (July 1).   

       

A Recap: Wages growth in the comfort zone 

Wages growth saw a modest uptick to 0.9% in the March quarter from 0.7% in the previous quarter. This lifted annual growth off its cycle lows of 3.2% to 3.4%. Despite the firming in these key outcomes, wages growth remained in the 'comfort zone' for the RBA at a pace consistent with its inflation target - abstracting for weakness in productivity, which the RBA assumes will slowly correct over time.  

The slight boost to wages growth in the March quarter was driven by the private sector, assisted by wage reforms enacted by the federal government in the childcare and aged care industries. On the back of this, private sector wages growth firmed to 0.9%q/q, leaving the annual pace steady at 3.3%Y/Y. In the public sector, new EBAs coming into effect in New South Wales, Victoria and Western Australia saw wages growth lift to 1% in the quarter from 0.7% previously. Annual growth was 3.6%, rebounding after slowing to 2.9% in the December quarter. 

The initiatives in the childcare and aged care industries are based around wages growth rising at a pace in excess of the increases to award rates determined by the Fair Work Commission. The phasing-in of these initiatives will continue to support wages growth (1.4%q/q, 3.8%Y/Y) in health care and social assistance industry over the coming quarters.   

RBA cuts cash rate by 25bps in August

There were no surprises from the RBA at today's meeting as the Monetary Policy Board (MPB) voted unanimously (9-0) to cut the cash rate by 25bps to 3.6%. Compared to last month's surprising and slightly confusing decision to hold (on a 6-3 vote split), the RBA was much clearer and had more conviction today. This was the third cut for the easing cycle - the cash rate now down 75bps since February - with today's cut reflecting increased confidence in the inflation outlook and some softening in the labour market. Based on market pricing for a gradual reduction in the cash rate to 3.1% by mid next year, the August Statement on Monetary Policy showed inflation and the labour market is forecast to remain on track with the RBA's objectives. This was the key message from Governor Bullock today, despite the post-meeting press conference becoming rather sidetracked by a modest downgrade to the RBA's assumption for productivity growth.  

Today's decision was straightforward for the MPB. The decision statement referred to the all-important quarterly inflation data for Q2 - the missing ingredient at the last meeting - noting that core inflation had made progress towards the middle of the 2-3% target band, while highlighting that the labour market had eased a little. Due to those considerations, the MPB concluded that 'a further easing of monetary policy was appropriate'. 

The RBA's outlook for inflation and the labour market - the key forecasts for monetary policy - effectively gave soft validation to markets pricing in at least 50bps of further rate cuts. This was a somewhat dovish surprise today given the RBA's cautious tone on easing. The inflation forecasts were left unchanged. Headline inflation (currently 2.1%) is seen rising to 3% by year-end as temporary rebates unwind, before easing in 2026 (2.9%) and 2027 (2.5%). More importantly, core inflation, currently at 2.7%, is forecast to ease a little further to 2.6% and then hold at this pace around the midpoint of the target band through the projections. In the labour market, the RBA continues to see the unemployment rate ticking up to 4.3% this year but to then maintain that level over 2026 and 2027, an unchanged outlook. 

The one area that has seen some movement is the growth outlook. The RBA cut forecast growth to 1.7% this year (2.1% previously) and 2.1% in 2026 (from 2.2%). At the post-meeting press conference, Governor Bullock explained this came about due to a downgrade in the RBA's assumption for productivity growth, to 0.7% by the end of the forecasts from 1% previously. Governor Bullock said this had no implications for monetary policy because the outlook for inflation and the labour market was consistent with its objectives. The tweak came about due to the judgement that GDP growth had disappointed the RBA's expectations due to an overly high assumption for productivity.

In terms of the outlook more generally, while a worst case scenario in the tariff war has likely been avoided, the MPB reaffirmed the effects on global trade are still expected to weigh on growth and inflation in Australia. Domestically, there is a sense that the RBA sees the recovery as a little fragile, with households cautious and reduced tightness in the labour market. All this vindicates market pricing for additional rate cuts; however, the RBA will likely remain reluctant to speed up its easing cycle from the series of quarterly rate cuts its has delivered so far this year. The next RBA monetary policy meeting is on 29-30 September. 

Preview: RBA August meeting

After being caught offside by the RBA's decision to leave interest rates on hold last month, it is a case of better late than never for markets that go into today's meeting (due 1430 AEST) with little trepidation in predicting a 25bps cut in the cash rate to 3.6%. In fact, forward-looking interest rate markets are of the view that the RBA will cut today and then again in November before winding the easing cycle up with one final cut next year, leaving the cash rate at 3.1%. Markets repriced for additional RBA easing after inflation continued to cool in the June quarter, and as the labour market showed signs of softening. Last time out, Governor Bullock said the decision to hold the cash rate at 3.85% (split 6 votes to 3) was more about 'timing rather than direction'. While the most likely outcome is a 25bps cut today, expect Governor Bullock at the press conference to continue the message that a cautious, gradual approach to rate cuts remains the appropriate way forward.  

The RBA held in July as it placed more weight on receiving the June quarter inflation data than on defying widespread market expectations to cut. With inflation subsequently confirmed to be within the 2-3% target band and easing in line with the RBA's forecasts after printing at 2.1% in headline terms (from 2.4%) and 2.7% on a trimmed mean or core basis (from 2.9%), the light to cut turned green on the report. Another factor supporting a cut today is that the labour market has shown signs of easing. Governor Bullock highlighted some of these signals in her recent speech on 24 July, including reductions in job vacancies and hours worked and less churn in the labour market from people switching jobs voluntarily. This is in addition to the soft employment outcomes reported for May (-1.1k) and June (2.0k), with the unemployment rate lifting to its highest level since late 2021 at 4.3%.  

Alongside today's rates decision, the RBA is set to publish its quarterly Statement on Monetary Policy that includes its latest economic forecasts. Compared to the previous Statement from May, there is less uncertainty around the global trade situation in terms of tariff rates imposed by the US - but the effects on growth and inflation are still very unclear. Domestically, risks around the labour market may have increased somewhat, but the RBA's cautious tone around policy easing suggests its outlook hasn't meaningfully changed. Overall, look for only modest tweaks in the forecasts for Australian inflation (headline CPI: 3% in 2025, 2.9% in 2026; core CPI: 2.6% in 2025, 2.6% in 2026) and growth (2.1% in 2025, 2.2% in 2026).

Macro (Re)view (8/8) | Tech fuels equity rally

The US tech sector led global equity markets higher this week, largely reversing last week's declines. A lack of new catalysts to unsettle markets saw G10 currencies rising against the US dollar, while global bond yields increased a little. Tariff exemptions granted by President Trump to semiconductor producers in exchange for commitments to either re-shore or commencing manufacturing in the US fuelled the equity rally - though details remain vague. Trump's nomination of Stephen Miran - his top economic advisor at the White House - to replace Adriana Kugler on the board of Fed governors following her resignation was another development of note. Miran's nomination, yet to be confirmed by the Senate, did not lead to any notable renewal of the concerns in markets over the politization of Fed policy; the tenure would be short term, running only until the end of January, and with the Senate currently in recess, Miran wouldn't commence until after the September Fed meeting. 

The Bank of England's decision to cut rates by 25bps to 4% this week was expected, albeit on a much finer margin than envisaged. The 5-4 majority for the decision was reached only after a second vote - a first in the Monetary Policy Committee's nearly 30-year history - after the first produced an impasse where 8 members were split down the middle between cutting by 25bps or leaving rates on hold, while the one remaining vote was for a 50bps cut. MPC member Taylor switched his vote in the second ballot from a 50bps to a 25bps cut to deliver the 5-4 majority. This was the 5th reduction of the easing cycle and continued the BoE's sequence of quarterly rate cuts, a pace it continues to describe as 'gradual and careful'. 

In the post-meeting press conference, Governor Bailey said that further easing would depend upon continued disinflationary progress - but the outlook is complicated. The BoE's latest Monetary Policy Report revealed that the inflation forecasts have moved higher (3.8% in 2025, 2.7% in 2026) - and upside risks have increased. On the other hand, the growth outlook is modest (1.2% in 2025, 1.3% in 2026), with downside risks attached. The BoE is easing into an outlook for higher inflation because it doesn't think that will last; however, given the experience of recent years, it is wary of higher headline inflation becoming more of a persistent threat in wage and price settings. Some of those concerns are attenuated by the MPC's view that the economy is operating below capacity, leading to lower inflationary pressures. Governor Bailey said how this 'balance of risks' plays out will direct policy. 

In Australia, despite July's surprise on-hold decision from the RBA, markets fully expect a 25bps rate cut to be announced at next week's meeting. Since the July meeting, the all-important Q2 inflation data confirmed that inflation remains well on track with the RBA's forecasts to hold at the midpoint of the 2-3% target band (see here). Meanwhile, signs of softening in the labour market have also emerged (see here). On the data front this week, household spending was reported to have lifted 0.5% in June, consistent with robust retail sales data. Meanwhile, the trade surplus widened sharply to $5.4bn in June as safe-haven demand for non-monetary gold in volatile market conditions drove exports to their fastest rise (6%) since September 2022.  

Australia's trade surplus widens to $5.4bn in June

Australia's trade surplus came in at $5.4bn in June (vs $3.7bn expected), rebounding from much narrower surpluses in April ($4.2bn) and May ($1.6bn). Exports saw their fastest rise since September 2022, accelerating by 6% in June as non-monetary gold exports surged to record highs on safe-haven demand in a volatile period for financial markets amid uncertainty around the US administration's new tariff regime. Monthly imports slowed with a 3.1% fall after rising by more than 5% over April and May. 

The trade surplus was $5.4bn in June, substantially wider than in May ($1.6bn) and comfortably above its level in April ($4.2bn). Collectively, the surpluses of the previous 2 months were revised down by around $1.3bn. This was a particularly volatile period in global trade following the long-awaited announcement by the Trump administration in early April of the United States' new tariff regime. Trade activity was pulled forward to front run the tariffs, leading to a pullback thereafter while uncertainty over tariff rates and timelines saw the US dollar - historically a source of stability in turbulent times - become the driver of volatility in foreign exchange markets. Looking back on the period, monthly trade surpluses averaged $3.7bn in the quarter, a step down from their average in the March quarter ($4.3bn). 

June exports lifted by 6% to $44.3bn, up 2.6% on 12 months ago. The standout factor in the month was non-monetary gold (36.7%), which hit a new record high ($5.8bn) as volatile trading conditions and economic uncertainty - as well as increased expectations for rate cuts - drove demand for the safe-haven asset. Non-rural goods also contributed with a 3.1% rise in June as coal (17.3%) and iron ore exports (2.3%) advanced.   

Imports weakened in June falling by 3.1% to $39bn but were still up by 3.1% through the 12 months. Capital goods (-9.1%) and consumption goods (-5.5%) saw large declines in the month - though both had risen at pace in April and May. 

For the June quarter, export revenue was $129.2bn, essentially held flat (-0.1%) from its level in the March quarter. Last week, the ABS reported that export prices fell by 4.5% in the quarter, with the uncertainty over global trade and the growth outlook weighing on commodity prices. Export revenue holding flat in this backdrop is a decent outcome. For imports, spending rose by 1.5% in the quarter to $118.1bn. Spending on both capital and consumption goods increased by more than 4% for the period. Import prices were clocked declining modestly by 0.8%q/q, unlikely to have given demand any meaningful support.  

  

Macro (Re)view (1/8) | Payrolls prompts 180

Weak US payrolls data upended markets going into the weekend, with a rethink of Fed policy now firmly on the cards. Conditions had been fairly sedate through President Trump's new tariff announcements and the Federal Reserve's latest meeting, but cracks emerging in the US labour market drove US and European equities to sharp declines. The US dollar gave back gains from earlier in the week alongside significant declines in Treasury yields, led by the front end of the curve as traders moved to price in two Fed rate cuts by year end. Despite advancing on Friday, the AUDUSD ended the week sharply lower on expectations that soft June quarter inflation data will tip the RBA's hand into further rate cuts.    

July's nonfarm payrolls report blindsided both markets and the Fed, indicating that conditions may be much less robust than thought. After the Fed left rates unchanged in the 4.25-4.5% range this week, Chair Powell's message in the post-meeting press conference was that policy was 'well positioned' in a modestly restrictive zone, with inflation a bit above the 2% target and labour market conditions assessed as broadly consistent with its maximum employment objective. The Fed's preferred inflator measure - the core PCE deflator - held a 2.8%yr pace in June. 

July's nonfarm payrolls report - while only one data point at this stage - was a surprise as employment rose by 73k on the month, disappointing expectations for a 106k result and pushing the unemployment rate up from 4.1% to 4.2%. Labour force participation was a tick lower at 62.2%. The major shock however came as gains to payrolls in May and June were reduced by an enormous 258k. This lowers the 3-month average change in payrolls to just 35k - its weakest momentum since the pandemic. Weak payrolls growth comes in a backdrop of slowing economic growth. June quarter GDP growth was better than expected at 0.7%q/q, but that mainly reflects tariff-related volatility. Across the first half of the year, GDP growth was 0.6%, well below its 1.4% pace from the back half of 2024. 

In the euro area, GDP growth was 0.1%q/q in the June quarter, levelling out after growth of 0.6% in the March quarter. Export orders to the US had boosted growth through the March quarter to front run Trump's tariffs on European-made goods. The EU-US trade deal, although resolving some uncertainty for businesses, has slapped a 15% tariff at the US border on imports from Europe. July's inflation estimate came in at an unchanged 2%yr on a headline basis - a touch above the 1.9% consensus - while the core rate held at 2.3%yr. Traders currently see the ECB leaving rates on hold through year-end. It is a different story in the UK, with the Bank of England expected to cut rates by 25bps at next week's meeting. 

Confirmation of ongoing disinflation in Australia effectively paves the way for a reluctant RBA to cut rates at its upcoming meeting on August 11-12. The Monetary Policy Board surprised markets with its decision to hold the cash rate at 3.85% last month, opting to wait for this week's quarterly CPI data rather than moving on the higher frequency but more volatile monthly series. In the key outcomes, both headline (0.7%) and core CPI (0.6%) came in 0.1ppt below market expectations in the June quarter (full review here). Annual inflation is comfortably inside the 2-3% target band, slowing from 2.4% at 2.1% on a headline basis (vs 2.2% expected) and from 2.9% to 2.7% on core (vs 2.7%). Importantly these outcomes are also consistent with the RBA's forecast track, which Governor Bullock has said is a prerequisite to a further reduction in the cash rate. 

A number of effects are swinging headline inflation around, including electricity rebates that are unwinding and volatile fuel and food prices, so the focus for the RBA has been on the core rate. Here, core inflation has been running at an annualised 2.6% pace through the first half of the year - essentially where the RBA wants it to be on the midpoint of the target band. That is backed up by services inflation - a persistent thorn in the RBA's side - easing from 3.7% to a 3-year low of 3.3%. Speaking post the release, RBA Deputy Governor Hauser said the inflation data were welcome but stuck to the 'gradual and cautious' line around lowering rates.  

Also of note in Australia, retail sales turned out a 1.2% splurge from households in the midyear sales in June (vs 0.5%), the strongest rise in spending since March 2022, as the 75-year-old survey came to the end of the line this week on a high (see here). Dwelling approvals also surprised upside posting an 11.9% rise for June, driven by the volatile higher density segment; approvals, however, remain well contained and declined across the quarter (see here).