Macro (Re)view (3/10) | Markets brush off shutdown concerns

Market sentiment remained upbeat despite the US government shutdown, which delayed the key nonfarm payrolls report for September. The availability of other data releases, including the next CPI report, is now uncertain. However, data issues aside, expectations are set firm that the Fed will cut rates once - if not twice - by year-end. The shutdown is also widely view as activity delayed not forgone, while markets are also sanguine due to the Atlanta Fed's estimate for Q3 GDP growth tracking at a robust 3.8% annualised pace. 

A hawkish hold from the RBA this week kept the cash rate at 3.6% in a unanimous 9-0 decision. The recent run of stronger inflation and consumption data has seen the Board's tone turn more hawkish since its previous meeting in August. Over this period, market pricing for the next 25bps rate cut has been pushed back from November into early 2026. A more cautious tone appeared to be communicated by the Board on this occasion as the recovery in private demand was tracking ahead of expectations, inflation was showing signs of persistence in some areas, and the labour market was holding steady (reviewed here). 

At the post-meeting press conference, Governor Bullock noted that wealth effects, including from housing prices that were up a further 0.8% nationally in September, were supporting consumption, while the full impact of the RBA's 75bps of easing had yet to play through. Amid ongoing uncertainty around the global economy, Governor Bullock put the emphasis on the incoming data, notably the quarterly inflation report for Q3, and the RBA's next round of forecasts due for the November meeting as key to its reaction function. The RBA also published its semi-annual Financial Stability Review this week. One theme identified was that macroprudential policy could be called upon if risks in the housing market from the RBA's easing cycle were to build.

The Australian data to hand this week showed the recovery in consumption had cooled a bit with household spending rising by just 0.1% in August (5%yr), below expectations (0.3%) after a downwardly revised increase in July (0.4%) (reviewed here). Strength in services categories (0.5%) kept spending above water, as goods consumption declined (-0.2%). Volatility in global trade flows crunched Australia's surplus on goods trade from $6.6bn to just $1.8bn in August, its lowest level since 2018 (reviewed here). Exports saw their sharpest fall in 3 years (-7.8%) as non-monetary gold exports halved from record highs in July. A 3.2% rise in imports, boosted by consumption goods (5.8%), accentuated the deterioration in the surplus.

In the US, the absence of the September payrolls report put the focus on alternative labour market measures and the JOLTS data from earlier in the week. This, however, provided contrasting reads on conditions; employment contracted according to the ADP data by 32k in September, while the employment component of the ISM services index (47.2) posted its 4th straight reading in contractionary territory in September. By contrast, the Ravelio series estimated employment rose by 60.1k in September. Meanwhile, the Chicago Fed estimated the unemployment rate would have come in at 4.3% for September, unchanged from August. The hard data on the labour market from the JOLTS report showed that job openings job were higher than expected in August (7.227mn), while layoffs (1.725mn) were also less bearish than feared.     

The euro area rates outlook remains unchanged, with the ECB set to stay on pause following the latest inflation data. Energy prices drove headline inflation up slightly from 2% to 2.2%yr in September and the core rate remained at 2.3%, both measures in line with expectations. In a speech this week, ECB President Lagarde said inflation risks 'appear quite contained in both directions'. Meanwhile, unemployment in the bloc remains around historic lows but ticked up from 6.2% to 6.3% in August. Over in the UK, June quarter GDP growth slowed to 0.3% (as expected) from a 0.7% pace in the March quarter. The upcoming Autumn Budget (26 November) remains the key focus for markets.  

Australian household spending rises modestly in August

Australian household spending rose by a very modest 0.1% in August, below expectations for a 0.3% increase. Annual growth eased from 5.3% to 5%. At Tuesday's RBA meeting, Governor Bullock cited the recovery in household spending as a factor in the decision to leave the cash rate on hold. Wealth effects from increasing asset prices, rising real incomes and 75bps of RBA rate cuts were all supporting household spending according to Governor Bullock. Improving sentiment is likely to also be a contributing factor.     

Household spending rose for the 4th straight month lifting by 0.1% in August. This followed earlier gains in this run of 0.4% in July (revised from 0.5%), 0.5% in June and 1% in May. The headline increase in spending for August was underpinned by areas including transport (0.8%) and hotels, cafes and restaurants (0.3%), helping to offset declines in recreation and culture (-0.9%) and alcoholic beverages (-0.9%).  

Taking a broader perspective, growth in household spending continues to be weighted towards services over goods. Services spending lifted a further 0.5% in August to be up 8.1% over the year. By contrast, goods spending declined for the second month running, down 0.2% after a 0.5% fall in July. Annual growth for goods is tracking at 2.5%.

Australia's trade surplus narrows to $1.8bn in August

Australia's goods trade balance fell from $6.6bn to $1.8bn in August, the lowest surplus posted since June 2018 and vastly below the $6.1bn figure expected. Exports were crunched by 7.8%, their sharpest fall in 3 years, on a pullback in non-monetary gold from record highs in July. Spending on imports meanwhile lifted by 3.2% in the latest month, rebounding from weakness through June and July. 

   

Australia posted its 92nd consecutive goods trade surplus in August, though at $1.8bn this was the smallest surplus since the early stages of this run dating back to the start of 2018. This was a sharp narrowing from last month when the surplus surged to $6.6bn, its highest since February 2024. Surpluses have swung around in recent months, a period of extreme volatility in global trade due to US administration's new tariff regime and subsequent delays around its implementation. Smoothing the volatility, the trade surplus averaged $4.3bn over the past 3 months, and it has been around this level through most of the year. 

Exports fell by 7.8% for the month in August to $41.9bn ($AUD terms), down 2.5% on 12 months ago. This was the largest month-on-month decline for exports since July 2022. Non-monetary gold exports nearly halved to $3.3bn in August (-47.2%), after accelerating to a record high in July ($6.2bn). While a notoriously volatile category, this is a surprising movement given the elevated levels the precious metal is trading at. Non-rural goods exports fell 2.8% to $31.8bn, driven by weakness in coal (-4.8%), LNG (-8.4%) and metals (-8%). Iron ore exports (0.2%) held their own. Going against the trend, rural goods lifted by 3.1% to $6.6bn; these exports have surged in value over the past year (22.1%) amid strong offshore demand for Australian produce.  

    

Spending on imports increased by 3.2% to A$40bn in August, a new record high that stands 7.8% above its level from 12 months prior. All categories rose in the latest month. Consumption goods increased by 5.8% ($12.7bn), their strongest lift since December 2023 - albeit after sizeable falls in June (-5.4%) and July (-3.2%). Underlying drivers included vehicles (7.1%) and clothing and footwear (5.7%). A 2% rise came through in intermediate goods ($16bn), while capital goods advanced by 1.8% to $9.9bn.