Macro (Re)View (10/7) | Hostilities renew

Hostilities in the Gulf flared up again this week with President Trump declaring the ceasefire was over. But with talks continuing, markets have been unbothered for now by a sharp reduction in shipping flows through the Strait of Hormuz. Brent crude oil touched midweek highs above $80 before closing around $75 on Friday, up more than 4% over the week. With the situation fragile, inflation risks persist. That was reflected in further increases in US Treasury yields, driven also by the FOMC meeting minutes noting 'almost all' participants saw rate hikes as necessary unless inflation pressures ease. The RBNZ reached that point this week, hiking by 25bps and indicated rates may rise further. 

Last week's soft US employment report (nonfarm payrolls +57k, unemployment rate 4.2%) left little lasting damage to Fed rates pricing for a rate hike by year-end, in part due to this week's hostilities in the Gulf pushing up oil prices. The minutes from the FOMC's meeting last month reaffirmed that the Fed under new Chair Warsh will at least sound less tolerant to above-target inflation. 

In Europe, the account of the ECB's June meeting where it increased rates by 25bps cast the move as a necessary step, pushing back against the notion of it being an insurance hike. That was backed up by President Lagarde's latest comments, saying that there were signs of second-round effects from the oil price shock flowing through the economy. Over in the UK, the BoE published its semiannual Financial Stability Report, highlighting the resilience of markets to the Gulf conflict; however, AI-related risks and vulnerabilities in parts of the market, including private credit, had increased. Responding to recent speculation, Governor Bailey said there would be no change to current bank leverage rules around government bond holdings. 

On the domestic front, a speech from the RBA's lead economist Sarah Hunter outlined the policy trade-offs facing the central bank. Hiking into the current supply-related shock is a communications challenge as much as anything, given that risks to growth and the labour market appear to be weighted to the downside. Hunter said these considerations need to be weighed up but appeared to argue that because underlying inflation was already elevated it had less scope to be patient.

Australia trade balance back in deficit in May

Australia recorded its largest trade deficit since December 2015 in May, its second deficit of the past 3 months. The trade deficit was $3bn in May, swinging from a $1.4bn surplus in April, with both exports (-6.9%) and imports (2.6%) contributing to the deterioration. The effects of the Gulf conflict, the data centre build out and volatility in gold exports are all playing a role. Nonetheless, the Australian dollar on a trade weighted basis is up more than 4% year to date.  

The trade account was in deficit by $3bn in May as import spending ($46.6bn) exceeded export earnings ($43.6bn). Australia ran trade surpluses every month from the start of 2018 through to February this year. But this result for May was the second deficit of the past 3 months, though the shift has lacked a defining driver. 

The $1.7bn deficit in March came as imports surged (12.9%) to facilitate the data centre build out and due to the fuel price shock from the Gulf conflict. However, the deficit for May was driven by a slump in exports (-6.9%). Even incorporating the rebound to a surplus in April ($1.4bn), the 3-month average for the trade balance was in deficit (-$1.1bn) for the first time since October 2016. 

Exports largely reversed their April rebound (7.2%) with a 6.9% fall in May, coming to $43.6bn - still up by 4.6% over the year. Non-monetary gold was a key factor, with those exports falling by 35% from the prior month. Meanwhile, non-rural goods declined (2.9%) on the back of weakness in iron ore (-9%). 

Spending on imports was up 2.6% to $46.6bn all told in May. That elevates imports to new record highs, having risen by almost 17% over the year. Capital goods rose sharply in the month (8.2%) but are off their recent peak in March when data centre investment went to new levels. A near 8% rise came through in consumption goods, boosted by a surge in new vehicle purchases (24.6%).    

Intermediate goods have gone on a tear following the surge in oil prices stemming from the blockade in the Strait of Hormuz, rising 9.5% in March and 13.8% in April. But that slowed in May to a largely level movement (0.3%). Fuel imports in May were $8.6bn, more than double their pre-conflict level in February ($4bn).  

Australian dwelling approvals fall 1.1% in May

Australian dwelling approvals for May fell by 1.1%, their fifth decline in the past 6 months as high-rise unit approvals have scaled back. By contrast, house approvals (3%m/m) brought strong momentum into the RBA's tightening cycle, reaching their highest level since the stimulus-driven surge coming out of the pandemic in late 2021. Meanwhile, data centres continued to see non-residential approvals soar. 

Residential approvals were down 1.1% month-on-month in May to 17k, a downside result on expectations (0%) but still up by 5.3% over the year. This saw the 3-month average (17.2k) ease back slightly, though approvals are still up sharply from cycle lows seen a couple of years ago.   

Approvals continued to diverge across segments. Unit approvals fell a further 7.3% to 6.3k (-5.9%yr); however, house approvals lifted 3% to their highest since September 2021 (10.7k) and are up by more than 13% over the year. The key question for the housing segment moving forward is the impact of the RBA's tightening cycle, with dwelling construction a highly interest-sensitive sector. The tax changes to housing around the treatment of capital gains and negative gearing in the recent federal budget shape as another key uncertainty. Housing prices are wavering on these effects; however, underlying demand for housing due to population growth over recent years remains strong.   

In the non-residential segment, data centres continued to dominate. Work approved increased 41% on the back of a 22.9% gain in May, surging to record highs at almost $11bn in the month, up around 65% on a year ago. Much of the activity in data centres is concentrated in New South Wales and Victoria.  

Macro (Re)View (26/6) | USD continues resurgence

A tech-led sell-off due to ongoing valuation concerns in the mega-cap sector weighed on global equities and by extension risk sentiment more broadly this week. In the FX, that backdrop hit cyclical currencies the hardest, with the euro and Australian dollar seeing the largest falls against an in-form US dollar - the DXY index sitting at its highest levels in more than a year, boosted by the recent hawkish Fed repricing. Meanwhile, safe-have demand saw bond markets rally, driving US 2-year and 10-year Treasury yields down by nearly 10bps over the week. In the UK, PM Starmer's resignation had little discernible impact on Sterling or UK assets.     

Strong Australian data was helpful for an RBA that elected to maintain its tightening bias at last week's meeting. However, markets remain unconvinced further tightening is required, leaving pricing for another hike this cycle largely unchanged at a one in three chance. The labour market added around 40k jobs in May, outperforming consensus (32.5k) but only rebounding from the seasonal fall in employment around Easter following downward revisions to April (-40.7k). Nonetheless, the unemployment rate fell back to 4.4%, partly reversing its rise to 4-year highs of 4.5% the month prior (see here). Meanwhile, job vacancies - despite falling 2.1% in the three months to May - remained at a little above 2% of the labour force, levels consistent with robust labour demand. 

Headline inflation fell 0.7% month-on-month in May, slowing the annual rate from 4.3% to 4%; however, that was mainly due to the ongoing effect of the excise tax cut on fuel prices (-11.9%). Core inflation, the RBA's main focus, firmed in May (0.4%) to lift further above the target band, up from 3.4% to 3.6%yr (see here). That is likely to reaffirm the RBA's view that the earlier cash rate hikes were justified and that it may yet tighten further. Household spending lifted 1.3% month-on-month in May, likely also contributing to that narrative (see here).

In the US, data confirmed inflation pressures are on the rise. The PCE deflator was up 0.4% month-on-month in May seeing the annual rate lift from 3.8% to 4.1%, a 3-year high. The core measure that the Fed sets policy to was in line with expectations at 0.3% month-on-month, firming from 3.3% to 3.4% year-on-year, significantly above the central bank's 2% target. Markets assign a 70-80% chance to the Fed hiking by year-end. The same report showed that that personal spending lifted above expectations with a 0.7% month-on-month rise, continuing to defy very weak sentiment.

Comments by ECB President Lagarde to the EU parliament were seen as broadly balanced, keeping the door open for further rate hikes while playing down the need for aggressive tightening. That stance acknowledges the uncertainty of the outlook as well as the risks to growth being weighted to the downside. By contrast, the ECB's Schnabel said that as things currently stand, more hikes would be needed.

Australian household spending up 1.3% in May

Australian household spending rose by 1.3% in May, defying headwinds from cost-of-living pressures, RBA rate hikes and weak sentiment. That was well above expectations for a 0.5% rise; however, spending was boosted by travel-related refunds as the effects of the Middle East conflict continued to impact the data. Meanwhile, the halving of the federal excise tax continued to drive petrol prices down.   

The household spending indicator rose by 1.3% in May, a continuation of the volatile profile in recent months following the conflict in the Middle East. This was after spending rose by 1.7% in March - driven by the fuel price shock - only to fall by 1.1% in April, weighed by refunds for travel due to mass flight cancellations in response to the conflict. In May, spending in all categories contributed to the headline increase, reflected in the chart below.     

Notably, discretionary spending performed to post its strongest rise (2.1%) in well over two years going back to January 2024. This included strength in clothing and footwear (2.7%), boosted by early end-of-financial-year sales, while hotels, cafes and restaurants (1.9%) lifted alongside major sporting and cultural events.  

  

Transport-related spending, currently the most volatile category, rose 1.4% in May. That was a rebound from the sizeable fall in April (-4.7%), due to travel refunds returning to more normal levels. The ABS's release noted that if airfares and refunds were removed, household spending would have only risen by 0.6% month-on-month. Meanwhile, the volume of fuel sales was estimated to have declined 0.4% month-on-month.  

Australian employment 40.3k in May; unemployment rate 4.4%

Australia's unemployment rate fell back to 4.4% in May, halfway to reversing its rise to 4-year highs of 4.5% in April. That was driven by a 40.3k increase in employment (vs 32.5k expected), which rebounded after falling during the Easter holiday period. But downward revisions showed a much larger fall in April (-40.7k) than was initially reported (-18.6k). In a separate release, job vacancies fell slightly for the 3 months ending May (-2.1%) but remained at levels consistent with robust labour demand. Alongside solid household spending data in May, RBA rates pricing was little changed, with markets leaving the door open for a further rate hike without being convinced one is required.        

Employment rose by a net 40.3k in May, a gain that was concentrated in the part time segment (35.2k) as full time employment lifted modestly (5.2k). This essentially confirms that the decline in employment in April was due to seasonal effects over the Easter holiday period. But today's report showed that decline was significantly larger than first reported by the ABS, revised to -40.7k from -18.6k previously, implying the weakest result since December 2023. Incorporating revisions, employment gains averaged just 6.4k over the past 3 months, a clear slowing in the momentum seen through the first quarter of the year. 

The headline unemployment rate printed at 4.4% in May, in line with expectations and falling back from 4.5% in April - its highest since late 2021. The unemployment rate avareged 4.2% through the first quarter of the year, another sign that labour market conditions have slowed. The more expansive underemployment rate (including those wanting more hours) was 5.9% in May, reversing a modest fall to 5.8% in April. Combined, total underutilisation stands at 10.2%, down from 10.3% in April but has trended higher since the end of last year. On the supply side, labour force participation was 66.7% in the month, rising from a downwardly revised 66.6% in April. Participation remains at historically elevated levels but is off cycle highs above 67%.  

The hours worked measure continues to show effects of seasonal volatility. Fewer people taking leave during the Easter holidays contributed to hours worked rising by 0.9% in April, despite the fall in employment. In May, that reversed as hours worked declined by 1.1% month-on-month to see annual growth slow from 3.2% to 0.5%. Both part time (-0.8%) and full time hours (-1.1%) declined in the month.  

Preview: Labour Force Survey — May

Australia's Labour Force Survey for May is out at 1130 AEDT today. This follows a very weak report for April where a near 19k fall in employment sent the unemployment rate to a 4-year high of 4.5%. Seasonal volatility around the Easter holiday period is widely thought to have been influential, driving expectations for a rebound in today's report. The RBA left rates on hold at last week's meeting, pausing its tightening cycle after three straight hikes. Governor Bullock expressed no immediate concern over the rise in the unemployment rate, but pricing for any further tightening this year has been wound back to a 1 in 3 chance.  

May preview: Rebound expected 

Expectations that the April report was heavily affected by seasonality around Easter has seen consensus fall on the side of forecasting a rebound in May. Employment is expected to rise by 30k (range: 15-45k), more than reversing the 18.6k decline in April. As the chart below shows, April was an outlier result on recent form given that employment was coming off four straight upside surprises. The unemployment rate is expected to tighten slightly by falling back to 4.4% from 4.5% currently (range: 4.3-4.6%).   

 

April recap: Unemployment rate reaches 4-year high 

The unemployment rate lifted to its highest since late 2021 at 4.5% as employment fell by almost 19k. These were significant downside surprises on the forecast outcomes for a 17.5k rise in employment and a steady unemployment rate at 4.3%. Seasonal volatility likely played a role as the survey period coincided with the Easter holidays, though that is yet to be confirmed.

April was the weakest month for employment since last November, with the 18.6k decline including falls in both the full time (-10.7k) and part time segments (-7.9k). That saw the unemployment rate rise from 4.3% to 4.5%, even as a decline in the participation rate (66.7%) reflected fewer people entering the labour force in April. 

Notwithstanding this, underemployment (including those wanting more hours) declined from 5.9% to 5.8% as hours worked posted a strong 0.8% month-on-month increase. Combining unemployment and underemployment, total underutilisation rose from 10.2% to 10.3%.  

Australian CPI 4% in May

Australian inflation fell in May (-0.7%m/m) as the federal excise tax cut saw fuel prices drop almost 12% after their 7% decline in April. This was the largest fall for a single inflation reading since the June quarter at the outset of the pandemic. Annual headline CPI slowed from 4.2% to 4%, defying expectations to rise to 4.3%. However, underlying inflation continued to rise, consistent with the domestic inflationary pressures that prompted the RBA to raise rates three times already this year before last week's decision to pause.  

Headline inflation fell by 0.7% month-on-month in May after rising 0.4% in April. As alluded to above, that was the largest fall seen in either a single month or quarter since the start of the pandemic in 2020. The halving of the fuel excise tax (in effect until the end of June) saw an initial fall in average petrol prices of 7% in April and that was followed up by an 11.9% decline in May. At the weekend, the federal government announced a 1-month extension of the measure but a lower rate to smooth the increase to fuel prices that will come from the eventual return of the full excise tax.  

Aside from falling fuel prices, holiday travel costs also had a significant influence of the decline in headline inflation in May. Domestic travel prices fell a little over 12% in the month following the Easter holiday period, while international travel declined slightly (-0.8%). This drove a decline in services inflation (-0.7%m/m), though it firmed slightly to 3.7% in annual terms. 

The parts of the basket that pushed up most on inflation were groceries (0.6%) and housing construction costs (0.9%), both arguably increases the RBA would see as consistent with second-round inflationary pressures. 

Taking a broader view, trimmed mean CPI increased in May, indicating that underlying inflationary trends remain in place. In the month, the trimmed mean rose 0.4% following April's 0.3% lift. This saw the annual pace increase from 3.4% to 3.6%, in line with expectations. That implies underlying inflation has returned to its pace from around the middle of 2024. 

Back then, the RBA had the cash rate set at 4.35%, the level where it currently sits after the three earlier hikes this year. Despite pausing its tightening cycle at last week's meeting, the RBA reaffirmed its hiking bias judging that upside risks to inflation had not abated - even after the US-Iran agreement to reopen the Strait of Hormuz. Markets price the chance of another RBA hike this cycle at around 50/50.  

Macro (Re)View (19/6) | Hawkish Fed supports USD rise

The backdrop of the US-Iran agreement continued to support sentiment, with brent crude sliding to pre-conflict lows below US$80/bbl during the week. Equities advanced broadly, but upside in the US was capped somewhat by a hawkish Fed at Chair Warsh's first meeting at the helm. This drove a flatter curve in the US and boosted the dollar. Despite the BoJ hiking rates by 25bps to 1%, USDJPY remains firmly above 160 and at highs since mid 2024. 

The first meeting led by Chair Warsh saw the Fed hold at 3.5-3.75% but the overall tone was more hawkish than expected. The main driver was the FOMC's updated projections, which now point to a rate hike by year-end - a notable shift from the rate cut implied in the March forecasts. A focus on returning inflation to target by the pledge that the FOMC 'will deliver price stability' was the clear message across the communications set, including a now trimmed-down decision statement and at the post-meeting press conference. Additionally, Warsh stressed that he would refrain from giving policy guidance, firm in the view that the FOMC should use market pricing as a signal rather than the other way round.

The Bank of England kept rates steady at 3.75%, voted through on a 7-2 majority by the Monetary Policy Committee. The only change to the vote split from the April meeting came from Megan Greene joining Huw Pill in voting for a 25bps hike. The core of the MPC in leaving rates on hold continued to place more weight on weakness in the labour market and in the economy more broadly than on hiking as a risk mitigation strategy to the energy price shock. 

The UK May CPI data on the eve of the meeting was a factor that helped the MPC maintain this approach. Headline inflation held at a 2.8%yr pace (vs 3% exp) while core conflation rose less than expected to 2.6%yr (vs 2.7%) from 2.5%. In his policy comments, Governor Bailey noted that tolerating above-target inflation due largely to energy prices was currently an appropriate trade-off for the MPC to manage given the recent data had provided 'greater confidence' that underlying disinflationary trends in the UK economy remained in place. 

In Australia, the RBA paused the cash rate at 4.35% this week after three straight hikes were judged to have left policy 'well placed' to respond to an outlook of 'heighted uncertainties'. The Board, however, left no room for doubt adding the line to its existing tightening bias that 'increasing the cash rate further' was possible as upside risks to inflation remained. That looks like a move aimed at ensuring financial conditions do not start to loosen, with market pricing for a rate hike by year-end now only seen as a roughly 50/50 prospect. 

At the post-meeting press conference, Governor Bullock said that rate hikes were already weighing on household spending and slowing the housing market. In addition, there was little concern attached to the recent rise in the unemployment rate and the lacklustre Q1 GDP growth outcome, with Bullock saying these are the sorts of data points that are required to reduce inflationary pressures. For more on this week's meeting, please see my review here.

RBA pauses in June

The RBA left the cash rate on hold at 4.35% at today's meeting in a unanimous decision (9-0) by the Monetary Policy Board. This pauses the RBA's tightening cycle after interest rate hikes at its first three meetings of the year. Despite the US-Iran agreement to reopen the Strait of Hormuz and signs that tighter financial conditions are slowing the Australian economy, Governor Bullock said the Board is not ruling out raising the cash rate further. Markets are split on whether the RBA will hike again in this cycle. 

Today's decision was widely expected after the Board hinted following its May meeting that a pause was likely, with three straight rate hikes leaving monetary policy 'well placed' to respond to developments. That theme carried over into the decision statement by noting the Board would now watch how the domestic economy evolves and observe how the oil market responds with the Strait of Hormuz set to reopen.

Uncertainty over the outlook remains 'heightened' and the Board in its discussions concluded that there were still scenarios that posed downside risks to growth and upside risks to inflation. In that context, Governor Bullock's main message at the post-meeting press conference was that the Board was leaving all options on the table regarding policy. 

The earlier rate hikes are judged to have tightened financial conditions, weighed on spending and slowed the housing market. However, there was not too much concern expressed over soft GDP growth in the March quarter or in the uptick in the unemployment rate to 4.5% in April. In fact, Governor Bullock went as far as saying these are required outcomes for it to counter risks of second-round effects of energy-driven inflation.

Accordingly, the Board has left its implicit hiking bias in place 'to do what it considers necessary' to meet its policy mandates for 2-3% inflation and full employment. To avoid any communication missteps, the Board went to the additional measure today of inserting the line that this potentially includes 'increasing the cash rate target further if required'. The next RBA monetary policy meeting is on 10-11 August.  

Preview: RBA June meeting

The RBA is widely expected to hold the cash rate at 4.35% today - its first pause of the year after three straight rate hikes. The energy price shock stemming from the Middle East conflict on top of renewed inflationary pressures in Australia prompted the RBA to change course this year after it cut rates three times in 2025. Recent data have been patchy, while the US-Iran agreement to suspend hostilities and reopen the Strait of Hormuz should remove the risk of another hike for now. Even with a pause today, the RBA is likely to retain its tightening bias. Inflation is above target and still forecast to rise further. Market pricing factors in a high chance of one more hike this year.   

The Monetary Policy Board voted 8-1 to hike by 25bps last time out in May, raising the cash rate to 4.35%. That was its third straight hike following the split decision (5-4) in March and the unanimous verdict (9-0) that started the tightening cycle in February. Having now reversed all three of 2025's rate cuts, the Board's stance was that rates were now 'well placed' to respond as the economic outlook evolves, implying that it is comfortable with pausing. However, it maintained its implicit tightening bias through its commitment to 'do what it considers necessary' to return inflation to the target. 

The Board is now likely to move to wait-and-see mode. At a recent Senate testimony, Governor Bullock said the incoming data had 'not been materially different' to its expectations, with the next forecast round not due until August - after the key June quarter inflation report. That summation of the data leaves room for debate given downside risks to growth appear to have increased. GDP growth in the March quarter was lacklustre ahead of the full impact of higher petrol prices and rate hikes (see here), while the unemployment rate rose to a high since late 2021 at 4.5% in April (see here).  

Governor Bullock reiterated to the Senate committee that higher rates had been necessary as risk mitigation for potential second-round effects from the energy price shock. The RBA has sought to slow demand so that higher energy prices are less likely to drive a more widespread and persistent increase in inflation and wage pressures. Higher rates are unable to offset inflation from rising in the near term. The RBA forecasts inflation to peak by mid-year at 4.8% in headline terms and 3.8% on a trimmed mean or underlying basis, up from 4.1% and 3.5% respectively at present in the quarterly data to March. Governor Bullock did, however, point to softer conditions in the housing market as a sign that tighter monetary policy was starting to take effect. 

Macro (Re)View (12/6) | Wait continues

A US-Iran agreement, including the end of hostilities and reopening of the Strait of Hormuz, remains reportedly close but is yet to be signed. Those developments sent brent crude below US$90/bbl for the first time since March, while global bond yields declined in response. Markets have been expecting a full deescalation for some time and have become less reactive to headlines, so these latest positive developments failed to drive a more convincing rally in risk assets. As expected, the ECB hiked rates, with attention now turning to the Fed's meeting next week. The RBA is also due to meet but should pause after three consecutive hikes.    

The ECB hiked its three key rates by 25bps for the first time since 2023 this week, increasing the main policy rate to 2.25%. The move had been strongly signalled in ECB communications since the previous meeting, reflecting concerns over the energy price shock from the Middle East conflict sparking a broader inflationary episode. President Lagarde made two key justifications for hiking rates in the post-meeting press conference amid broader criticism of a policy error.

Firstly, the decision was unanimous amongst Governing Council members, and secondly, hiking was 'robust' across all forecast scenarios published in the ECB's latest macroeconomic projections. Those projections raised the outlook for inflation and lowered forecast growth in 2026 and 2027. Uncertainty lingers over rates moving forward. Post-meeting reporting quoting ECB sources indicated that a follow-up hike in July was possible while other reports suggested a pause was likely. Market pricing largely factors in two more rate increases by year-end. 

US inflation data on the eve of the Fed's meeting next week reaffirmed market expectations that the key debate is whether rates are set for an extended pause or if a hike will eventually be required. The post-meeting press conference will be the first for Kevin Warsh and will give markets a sense of how the new Fed Chair sees policy evolving. Headline CPI in May came in at 0.5%m/m, lifting the annual pace from 3.8% to 4.2%, a high since April 2023. Key drivers related to the energy price shock, with gasoline up 7% and airline fares rising 2.7%. Core inflation (excluding food and energy) was slightly softer than anticipated at 0.2%m/m and 2.9%yr, up from 2.8%.

Australian data was limited to consumer and business surveys. The Westpac-MI report showed consumer sentiment declined 2.9% in June, largely reversing the modest improvement (3.6%) in May. Sentiment has fallen almost 15% so far in 2026, with the RBA's hiking cycle a major concern for households, adding to cost-of-living pressures. The RBA is, however, widely expected to hold rates steady next week. The NAB Business Survey reported trading conditions remained slightly below average in May, with the major effects of the current backdrop being reflected in weak confidence. Margins are coming under pressure, with input costs rising by more than selling prices.

Macro (Re)View (5/6) | Fed outlook shifts on strong payrolls

US equities posted their largest weekly declines in at least a year after strong payrolls data drove a hawkish repricing, with markets now pricing in a 25bps hike from the Fed this year. This lent support to the USD, following market rates higher. The 2-year treasury yield rose to 4.15%, its highest since February last year. Meanwhile, the ECB is expected to hike next week. Whereas at the RBA, a weak growth outcome in the March quarter looks like putting the brakes on further hikes for now.    

An upside US nonfarm payrolls report now sees markets pricing in a Fed rate hike by year-end. Employment rose by 172k in May, well above the 88k consensus. Upward revisions of 93k over March and April lifted the 3-month average for payrolls growth to 188k, its highest since March 2024. The unemployment rate was steady at 4.3% for the third month running, while the broader unemployment rate declined slightly to 8.1%. 

The degree of tightness in the labour market is a key consideration for the Fed moving forward. This was a strong report, but the monthly figures (and the revisions) are volatile. Lower labour force participation has also played a role. After trending down since late last year, the participation rate, unchanged in May at 61.8%, held at lows since October 2021. 

The ECB is on track to tighten policy at next week's meeting, in line with recent guidance and market pricing for a 25bps hike. The tone of President Lagarde's press conference as well as updated economic forecasts will be key given markets are pricing in at least one further hike later in the year. This could hinge on the balance of risks between the outlook for growth and inflation, where the former has up until recently has held more weight with the Governing Council. 

Australian economic growth was softer than expected slowing from 0.9% to 0.3% in the March quarter, though annual growth was steady at 2.5%. The slowdown was driven by net exports (-0.8ppt), with the fuel price shock and RBA rate hikes yet to impact. These headwinds risk slowing domestic demand (1%) that was looking fairly solid in the March quarter, supported by surging business investment (5.7%) and moderate household consumption growth (0.5%). 

This was the strongest quarter for business investment in well over a decade, driven by the capex boom in data centres in tech- and AI-related industries. Much of the capital equipment required in data centre fit-outs is import-intensive, which weighs on GDP growth in the short term. Cyclones that disrupted the resources sector was another key factor behind the large deduction to growth from net exports. My full review of the March quarter National Accounts is available here. 

Slowing growth with risks to the downside has reaffirmed RBA rates outlook, with a further hike to the cash rate priced no higher than a 50/50 prospect. Speaking at a Senate testimony, RBA Governor Bullock said the 75bps of rate hikes delivered this year had been required to cool domestic inflation pressures, and to guard against the risk of the oil price shock sparking another broader inflationary episode. Bullock said there were already signs in the housing market that higher rates were taking effect.

Australia's trade balance returns to surplus in April

Australia's trade balance moved back into surplus in April ($1.8bn), after slipping into deficit for the first time in 8 years in March (-$1bn). Exports accelerated at their fastest pace (7.2%) since mid-2022, driven by the major commodities. That far outpaced a modest lift in imports (0.8%). Higher oil prices amid the blockade in the Strait of Hormuz saw the cost of fuel imports surge, but the capex boom in tech-related equipment eased.  

The trade balance swung from a small deficit in March (-$1bn) to a small surplus in April ($1.8bn). Across the past 3 months, the trade surplus averaged $1.9bn - its lowest since July 2018 - continuing the downward trend of the past few years.  

Total exports rose by 7.2% - their fastest increase since June 2022 - to come in at $47.2bn. That saw annual growth rise to 10% from -1.9% in the year to March. The major driver of this strength came from an 11% acceleration in non-rural goods exports ($33.6bn). This reflected strong gains across the key commodities: iron ore 18.5%, coal 15.2% and LNG 2%. Details from the relase indicated these gains were linked to a step up in export volumes, rebounding weather-related disruptions, as highlighted in yesterday's National Accounts (see here).  

Imports were held to a 0.8% rise in April, in at $45.4bn for a 12-month increase of 18%. Higher oil prices due to the Middle East conflict led to fuel imports surging by a further 41.4% in April after an even larger increase in March (53.6%). Over these past two months, the cost of fuel imports has more than doubled, up 117.1%.  

Capital goods pulled back (-16.4%) after rising strongly in March (29%). The main driver was a slowdown in ADP equipment, falling 41.7% following a more than 170% surge to facilitate the data centre build-out last month.