Preview: Labour Force Survey — July

Australia's labour force survey for July is due this morning (11:30am AEST). Although tightness in the labor market has eased modestly, conditions have broadly defied the headwinds from a slowing economy. Strong employment growth through the first half of the year played a key role in limiting the rise in the unemployment rate to 4.1% in June. Declines in job vacancies and slower growth in hours worked have been the more visible margins of adjustment. In its August Statement on Monetary Policy, the RBA forecast a slightly higher peak in the unemployment rate of 4.4% by mid-2025; however, the central bank actively pushed back against market pricing for a 25bps rate cut by year-end at its most recent meeting, a clear contrast with many of its peers already cutting - or about to cut - policy rates.

June recap: Employment continued to outperform expectations 

Following solid increases in April (36.2k) and May (39.5k), employment accelerated by 50.2k in June (full time 43.3k/part time 6.8k) - the third consecutive upside surprise. In total, employment lifted by almost 130k in the quarter, broadly matching the gain in Q1.  

Strong employment outturns are helping to keep pace with growth in the labour force, holding down the national unemployment rate. Illustrating this, the unemployment rate remained at 4.1% in June as the participation rate increased to a near-record high (66.9%). A fall in the broader underemployment rate from 6.7% to 6.5% saw the overall level of labour force underutilisation tighten from 10.7% to 10.5% - a low since March. 

Following declines in April (-0.2%) and May (-0.5%), hours worked rebounded by 0.8% in June. In spite of this profile, hours worked rose strongly in the June quarter (1.6%) compared with the March quarter. However, growth in hours worked for the 12 months to June was 1.4%, down from 4.9% a year earlier - a sign of how firms are responding to slower demand.     

July Preview: Employment gains expected to moderate     

The key question going into today's report is whether employment continues to defy expectations for a slowdown. The median forecast is for employment to moderate to a 20k rise in July - albeit around a wide range of estimates (+50k to -5k). Markets have held a similar forecast (20k) for each of the past 3 reports, with - as noted earlier - employment comfortably outperforming on each occasion. 

If the moderation does come in July, how markets interpret the outcome will be interesting; will it be viewed as a moderation in the context of the strength in recent reports, or will it be taken as a sign of something that raises more concern. The unemployment rate is expected to remain at 4.1% (range: 4% to 4.2%), based on labour force participation holding at its current level (66.9%).

Australian Q2 Wage Price Index 0.8%; 4.1%yr

Momentum in Australia's Wage Price Index (WPI) has continued to slow printing at 0.8% in the June quarter, below the 0.9% outcome forecast. This came despite a change in Commonwealth public service pay agreements that boosted public sector wages growth by the most in a June quarter in 12 years. Annual wages growth held up at 4.1%, some 20bps higher than forecast due to upward revisions to the outcomes from Q3 last year (1.3% from 1.2%) and Q1 this year (0.9% from 0.8%). 

The WPI - a measure of growth in base wages across a fixed basket of jobs in the Australian labour market - recorded a 0.8% rise in the June quarter. This was the slowest quarterly rise seen in a year. The momentum in wages growth has slowed as tightness in the labour market has eased and earlier large increases to awards and agreements (in catch up to high inflation) have not been repeated.

Annual growth in the WPI remained at 4.1% - just below the cycle high of 4.2% at the end of 2023 - but the recent momentum points to a sharp slowing looking out to the back end of the year. Wages growth is running at 3.2% and 3.4% in 3-month and 6-month annualised terms respectively. This also points to downside risks to the RBA's forecast for wages growth to slow to 3.6%Y/Y by year-end, a projection the Bank revised down from 3.8%Y/Y in last week's Statement on Monetary Policy. 

However, due to the RBA judging that there is less supply capacity in the economy than it previously assumed, it will be looking at today's numbers cautiously in terms of the implications for its outlook for wages growth. Meanwhile, if employment growth remains as resilient as it has been through the first half of the year, then wages growth may not slow as sharply as implied by the recent momentum in the WPI. The next employment report (for July) is due on Thursday morning. 

Turning to the internals of today's report, private sector wages growth came in at 0.7% in the quarter - the slowest rise since Q4 2021. This saw the annual pace ease from 4.2% to 4.1%. 

The ABS reported that just 11% of private sector jobs saw a wage movement in the quarter, broadly in line with the same quarter last year. Of those jobs, the average pay increase was 4.2% compared to 4.5% last year. The lower chart below shows that the bulk of wage increases occurs in the September quarter, so that report carries much more weight than today's in terms of the outlook for wages growth. 

In the public sector, wages growth lifted from 0.6%q/q in the March quarter to 0.9%q/q in the June quarter. The ABS noted this was the fastest rise in public sector wages seen in a June quarter since 2012. This reflected a change in the timing of wage increases in the Commonwealth public service, now effective for all jobs from mid-March rather than on varying schedules as stipulated in departmental agreements. Because of the boost to quarterly wages growth, the annual pace lifted from 3.8% to 3.9%. 

The next chart aggregates the industry-level data on wages growth (full details are in the summary table above) into broad sectors. It shows that while wages growth remains broadly elevated, it has plateaued across most parts of the labour market. 

Preview: Wage Price Index Q2

The June quarter print of Australia's Wage Price Index (WPI) is due to be published at 11:30am (AEST) today. Wages growth remains at an elevated pace, though easing conditions in the labour market suggest the peak came in late 2023. In today's report, the annual pace of wages growth may retrace below 4% for the first time in a year.

A recap: Wages growth eases from cycle peaks 

The WPI increased by 0.8% in the March quarter - its slowest quarterly rise since Q4 2022 - to 4.1% through the year, down from a cycle peak of 4.2% at the end of 2023. Wages growth remains around its fastest pace since 2008/09 reflecting the post-pandemic strength in the labour market and wage-setting processes catching up to a high inflationary backdrop. 

The underlying dynamics suggest wages growth has peaked. Although still low, the national unemployment rate averaged 3.9% in the March quarter, up from cycle tights of 3.5% in late 2022. The ABS reported that just 14% of jobs covered by the WPI saw a wage change in Q1 compared to 19% a year earlier. Meanwhile, the average hourly wage change eased to a 4% pace from 4.4% in the prior quarter. Individual agreements - the main contributor to the upswing in wages growth linked to the strength in the labour market - continued to show signs of easing, while enterprise agreements and awards also made smaller contributions to wages growth. 

Wages growth moderated in the private (0.8%q/q, 4.1%Y/Y) and public sectors (0.5%q/q, 3.8%Y/Y) - the slowest quarterly gains for both sectors since Q1 2022. In recent quarters, public sector wages growth has been boosted by changes to wage caps and from new enterprise agreements coming into effect, drivers that saw the public sector overtaking wages growth in the private sector for the first time in the cycle in the final quarter of 2023. 

Wages growth to reflect labour market resilience 

The median forecast is for the WPI to post a 0.9% increase in the June quarter, with estimates ranging from 0.8% to 1.0%. If the median forecast is met, the annual pace of wages growth (assuming there no backward revisions to prior quarters) would ease to 3.9%. In last week's Statement on Monetary Policy, the RBA revised its outlook for wages growth down from 3.8% to 3.6% by year-end. That revision came as the outlook for the unemployment rate was raised slightly to a peak of 4.4% (from 4.3%) and from information received by the RBA in its liaison discussions with firms that stable or slower wages growth was expected. 

Macro (Re)view (9/8) | Markets stabilise as volatility eases

While still elevated, cross-market volatility eased this week on reduced US recession fears and an associated scaling back of Fed rate-cut expectations. The unwinding of overcrowded trades was also a factor that saw US equities and the Yen stabilise. A couple of major risk events in the US are ahead next week including the July updates for CPI (Wed) and retail sales (Thu). Weakness in these data points likely sees a renewal of recession trades; however, outturns that suggest the US economy remains resilient has the potential to unlock equity upside and offer support to the dollar (DXY) that is sitting at its lowest levels since March.

 

Heightened focus on indicators of US growth during what was a light week for top-tier indicators led to markets keying off the ISM services report and the latest reading of jobless claims. An improved showing from the services sector saw activity rebound to an expansionary reading of 51.4 in July after contracting in June (48.8). Underlying the rebound were swings in the employment (51.1 from 46.1) and new orders (52.4 from 47.3) components, both consistent with signs of economic resilience. Following this, weekly jobless claims came down from 249k to 233k, below the 240k consensus, which encouraged markets; however, continuing claims showed little movement (1.875mn).

In the euro area, retail figures for June reported a 0.3% decline in volumes compared to the previous month - surprising to the downside of expectations (-0.1%). This weak outcome suggests that cost-of-living pressures and higher interest rates continue to weigh on demand. Although the ECB has commenced its easing cycle, it remains wary that persistent inflation may limit the extent to which it is able to dial back on restrictive policy. It is a similar story in the UK for the Bank of England. The central bank will be watching next week's CPI report for July closely, in particular the data on services inflation.   

The RBA's decision to leave rates on hold (4.35%) came with a hawkish tone as Governor Bullock pushed back against market pricing for a rate cut by year-end. While many of its central bank peers are now more sensitive to the trade-off between inflation and growth, the RBA asserts there is still an asymmetry of risks to persistent inflation in Australia. Accordingly, the Board stated it remains 'vigilant to upside risks to inflation and ... is not ruling anything in or out'. A slightly more delayed return to the midpoint of the 2-3% inflation target band in 2026 is now anticipated after the RBA concluded in its August Statement on Monetary Policy that the economy is operating with a greater degree of excess demand than previously estimated. Elaborating on this in a speech following the meeting, Governor Bullock said that inflation was proving persistent due to this imbalance between demand and supply. For more in-depth analysis of the August meeting, please see my review here. Key events on the domestic calendar next week include the Q2 Wage Price Index and the July Labour Force Survey. 

RBA extends hold in August

What had shaped as a live policy meeting only last week was fairly uneventful in the end as the RBA left its key rates unchanged (cash rate 4.35%, exchange settlement rate 4.25%) today. The Bank of Japan aside, the RBA is probably the most hawkish G10 central bank, with Governor Bullock today actively pushing back against pricing for a rate cut by year-end. But, like its peers, the RBA is in the hands of the data and things could change quickly. 

The decision statement from the Board repeated the same key themes from the previous meeting in June: inflation is persistent and above target; the outlook is highly uncertain; and its priority remains on restoring inflation to the 2-3% target range. Given all this, the RBA is not yet talking about cutting rates. In fact, at the post-meeting press conference, Governor Bullock said that a rate cut in the near term (over the remainder of the year) wasn't on the radar and that the Board had considered hiking rates today. But in the final analysis, the Board held a steady hand having been mildly encouraged by last week's Q2 CPI report in which headline (3.8%Y/Y) and core CPI (3.9%Y/Y) printed broadly in line with the RBA's May forecasts. 

Alongside today's decision, the RBA published a new set of forecasts in its August Statement on Monetary Policy. The main point to highlight in the August forecasts is that the RBA now expects a slightly later return of inflation to the midpoint of the target band, though still in 2026 and clearly not a significant enough change to warrant a higher cash rate. That shift came about due to the RBA judging that the economy is operating with a greater degree of excess demand than previously assessed. Accordingly, the growth outlook was revised up to 1.7% in 2024 (from 1.6%) and 2.5% in 2025 (from 2.3%). However, the unemployment rate is now seen rising to a peak of 4.4% over the coming year, up from 4.3% previously. 

All in all, the RBA characterised today's decision as balancing its objective of returning inflation to target within an acceptable timeframe without coming at the expense of a sharp easing in the labour market. The Board's guidance remains that it is 'not ruling anything in or out' and that it needs to be 'vigilant to upside risks to inflation'. Interestingly, a new line was added to the statement that policy 'will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range'. Many of the RBA's peers now easing policy have used a similar line ahead of cutting rates. 

Preview: RBA August Meeting

The RBA goes into the August meeting looking over persistent inflation, a robust labour market and an uncertain economic outlook. Conditions are not yet at a stage where the RBA can start talking about rate cuts; however, it will likely want to avoid sounding overly hawkish with 5 other G10 central banks already easing monetary policy and the US Federal Reserve potentially joining that group with a frontloaded cut in September. Today's decision (due at 14:30 AEST) should see the Board leaving the cash rate on hold at 4.35%, unchanged since last November. 

For much of the intervening period since the 18 June meeting, the speculation has been whether or not the RBA would raise rates in August. Market pricing for an August hike climbed to more than a 50% chance following the May CPI report (released 26 June) that showed an uptick in the monthly gauge to 4%. But markets have subsequently priced out any chance of an RBA hike and are now weighing up the timing of the first cut. Two factors have been key here. Firstly, cooling inflation data in the US and an increasingly dovish Fed have had spillover effects on rates pricing globally and in Australia. Secondly - the more influential factor - last week's quarterly CPI print for Q2 did not produce the upside surprise to warrant a hawkish revision to the RBA's outlook for returning inflation to the midpoint of the 2-3% target band in 2026, the logical threshold for a justifying a rate hike. 

The Q2 report showed headline CPI came in at 1% quarter-on-quarter and 3.8% year-on-year while the trimmed mean or core rate was 0.8%q/q and 3.9%Y/Y. Those outcomes compare to the RBA's May forecasts of 3.8% year-on-year inflation for both headline and core CPI. Essentially, inflation is where the RBA expected it to be and the August forecasts in the Statement on Monetary Policy (released alongside the rates decision) will take into account the range of cost-of-living support measures announced by governments at the federal and state levels over recent months. These initiatives will lower measured inflation over the coming year or so, another factor behind the pricing-out of prospects for an August rate hike. 

Overall, the strategy reaffirmed by the RBA as recently as the June meeting of gradually returning inflation to target to preserve the labour market is still the way forward for the central bank. Labour market tightness is easing and the forecast for the unemployment rate to rise to 4.3% over the coming year is unlikely to shift much based on the recent data. The most likely path for the RBA today appears to be to maintain the line that it has held since March that it is 'not ruling anything in or out' but to reiterate that it will 'remain vigilant to upside risks to inflation'.

Macro (Re)view (2/8) | Markets shift to frontloaded Fed easing view

Signs that US growth has crossed an inflection point hit risk sentiment heavily this week. Markets are now anticipating a more frontloaded start to the Fed's easing cycle, reflected in the sharp movement lower in Treasury yields. This had spillover effects on yields in other countries; in Australia's case, the key Q2 CPI report was an additional factor as RBA hikes were priced out. A weaker US dollar in combination with the announcement of a 15bps rate hike from the Bank of Japan strengthened the yen significantly.  

US labour market data for July missed expectations, putting a different complexion on the Fed's gradual approach to commencing its easing cycle. The Fed left rates unchanged (5.25-5.5%) but gave clear signals it will cut at the September meeting. From a position of being 'highly attentive to inflation risks', the decision statement was adjusted to note the Fed now acknowledges 'the risks to both sides of its dual mandate' for inflation and employment. In the post-meeting press conference, Chair Powell said the overheating it saw in the labour market had cooled and that the decline in inflation was now more broadly based across goods and more persistent services components, including housing. 

Overall, the Fed meeting put added attention on the July employment report. In the event, nonfarm payrolls came in at 114k for July, well short of the 175k consensus figure and with -29k of backward revisions to the prior two months. With the participation rate moving a tick higher to 62.7%, the unemployment rate lifted from 4.1% to 4.3% (vs no change expected) to touch its highest level since October 2021. Meanwhile, growth in average hourly earnings eased from 3.9% to 3.6%yr, a more than 3-year low that is consistent with reduced labour market tightness. 

The Bank of England has become the 5th G10 central bank now easing monetary policy. A shift in the vote pattern from the Monetary Policy Committee (MPC) swung the majority narrowly (5-4) in favour of a cut, lowering Bank Rate by 25bps to 5%. With headline CPI sitting at BoE's 2% target in May and June and rising confidence in its inflation forecasts, the decision statement noted that it was 'now appropriate to reduce slight the degree of policy restrictiveness'. However, given the finely balanced nature of the decision and the legacy of uncertainty of the past few years, the MPC steered clear from giving any forward guidance on rates. 

In the post-meeting press conference, Governor Bailey said that the key for policy was how the incoming data informs the MPC's understanding of the outlook for inflation. It remains wary that services inflation and labour market tightness could see inflation remaining persistent. However, its base outlook in the August Monetary Policy Report is that under the market path for Bank Rate (factoring in more than 100bps of cuts over the next couple of years), inflation falls to 1.7% in 2026 and 1.5% in 2027. A similarly cautious tone accompanying a rate cut has also been the playbook from the European Central Bank. That was validated by upside surprises in the July inflation print, with the headline measure ticking up from 2.5% to 2.6%yr (vs 2.5%) and the core rate holding at a 2.9%yr pace (vs 2.8%). 

Australia's CPI inflation outcomes for the June quarter were broadly in line with consensus and Reserve Bank of Australia forecasts, resulting in pricing for an RBA hike in August coming out of the market. Headline CPI was 1%q/q and 3.8%Y/Y, up from 3.6% in Q1; trimmed mean (or core CPI) was 0.8%q/q and 3.9%Y/Y, easing from 4% previously. The main takeaway from the report is that a hawkish revision to the RBA's forecast for a return to the midpoint of the 2-3% inflation target band in 2026 looks highly unlikely. That situation is set to see the Board remaining on hold at next week's meeting (4.35%), though the message around needing to remain vigilant to inflation risks will likely be retained. My detailed review of the CPI report can be accessed here. For those with AUD exposures, the activity data for June released this week may be of interest, including retail sales rising 0.5% (see here); dwelling approvals declining 6.5% (see here); the monthly trade surplus widening to $5.6bn (see here); and housing finance resuming its upswing with a 1.3% lift (see here). 

Australian housing finance resumes upswing in June

Australian housing finance commitments resumed their upswing in June (1.3%), largely reversing a modest decline in May (-1.7%). Both major segments rebounded from falls in May, with commitments to investors up 2.7% and 0.5% for owner-occupiers. The fundamentals of tight supply (low listings and home completions) amid strong demand continue to put upward pressure on housing prices, with lending commitments rising as a result - despite the effect of higher interest rates. Commitments have increased by 19.1% over the past year. Earlier in the week, CoreLogic reported the 18th consecutive monthly rise in the national median housing price to $798.2k as of July. The average loan size for an owner-occupier moved up to $636.6k in June. 

Housing finance commitments nationally rose by 1.3% in June to a $29.2bn figure. Across the June quarter, commitments saw a 7.5% rise - the strongest quarterly rise since Q1 2021. Investor activity accelerated in Q2 with commitments to the segment rising by 9.9%. On a state basis, quarterly lending to investors was up double digits in Qld, WA, SA and Tas and by 9.6% in NSW and 8.5% in Vic. Owner-occupier commitments increased by 6.2% in the quarter, with WA (12.3%) seeing the fastest gain. The composition of lending growth in Q2 was similar to what was observed in the final quarter of 2023 before activity saw a slow start to the new year. 

For owner-occupiers, loan volumes were up across the board in the June quarter. Construction-related loans picked up to rise by 9.2%, consistent with the increase in dwelling approvals. Loans to upgraders rose by 2.2%, while first home buyers saw a 5.8% lift. 

Refinancing was down 1.9% in June, the 8th decline in the past 12 months. Activity has retraced followed the earlier run-up through the RBA's tightening cycle, with the central bank holding rates unchanged since last November.

Australia's trade surplus widens to $5.6bn in June

Australia's goods trade surplus came in above expectations at $5.6bn in June from a downwardly revised $5.1bn in May. Moderating strength in export revenues and elevated import spending has seen the size of the trade surplus narrow. The surplus for the June quarter was $16.3bn, down from $20.4bn in the March quarter and the lowest quarterly total since Q4 2020.   

Monthly exports lifted by 1.7% to $43.8bn in June (-2.8%yr). This reflected increases across the board: rural goods 5.6%, non-rural goods 0.8% and non-monetary gold 5.6%. However, export values saw a 3.4% decline for the June quarter, retracing to $129.3bn - the lowest level since the final quarter of 2021. Commodity price weakness on softer global demand led to weakness in rural goods (-5.1%) and non-rural goods (-3.6%). The ABS's trade price series, also released today, showed export prices were down 5.9% for Q2 as iron, coal and natural gas all saw material price declines. 

Imports for June moderated to a 0.5% rise following a 3.3% lift in May. The total for imports in the month was $38.2bn, remaining around record highs. Imports for the June quarter came to $112.9bn, a slight decline (-0.5%) on the previous quarter, but again at a level just off record highs. The main movements in the quarter were declines in consumption goods (-1%) and intermediate goods (-0.5%); by contrast, capital goods advanced (0.7%). The ABS reported a fairly modest 1% rise in import prices in Q2. This combination of increased spending but lower prices implies volume demand for imports contracted.  

Australian retail sales 0.5% in June; Q2 volumes -0.3%

Australian retail sales rose solidly for the second month in succession up by 0.5% in June (vs 0.2% expected) as end-of-financial-year sales continued to drive spending. However, quarterly volumes still contracted by 0.3%, highlighting that household demand remains weak amid cost-of-living pressures and higher interest rates. 

Nominal retail sales lifted by 0.5% in June following increases of 0.6% in May and 0.2% in April. This amounted to a 0.7% rise in retail turnover across the June quarter, the strongest quarterly rise since Q4 2022. Despite promotions and discounting during end-of-financial-year sales, retail prices still increased during the quarter seeing a 0.9% rise (2.6% year-on-year). As a result, inflation-adjusted sales (or volumes) contracted by 0.3% for the quarter and by 0.6% through the year, painting a picture of weak demand as households have been forced to cut back due to the higher cost of living and to meet increased mortgage repayments. 

The key details for quarterly volumes showed weakness across categories including food (-0.9%), clothing and footwear (-1.7%), department stores (-0.8%) and cafes and restaurants (-0.7%). There were increases in volumes for household goods (1.3%) - the ABS highlighting a boost in items such as furniture, bedding, TVs and laptops - and from 'other' retailing (0.9%). 

Retail price inflation (0.9%) posted its strongest quarterly rise since Q2 2023; however, the annual rate has remained steady around a 2.5% pace over the past few quarters. This is still a relatively elevated pace in a historical context but is down substantially from the peak in late 2022 (7.4%).  

Australian Q2 CPI 1%, 3.8%Y/Y

Australia's CPI inflation report for the June quarter is set to keep the RBA on hold at next week's policy meeting. Markets had factored a rate hike at around a 30% chance, but this has been completely priced out post release as headline CPI matched expectations at 1% quarter-on-quarter and 3.8% year-on-year (up from 3.6% previously), while the key trimmed mean measure (the RBA's preferred gauge of core inflation) was softer than anticipated at 0.8%q/q and 3.9%Y/Y (down from 4%). These outcomes compare to the RBA's May forecasts of 3.8% year-on-year inflation for both headline and core CPI. A hawkish revision to the RBA's outlook for a return to the midpoint of the 2-3% inflation target band in 2026 - the logical threshold for an August hike - looks unlikely after today's report. 

The June quarter CPI print showed headline inflation came in at 1% in quarter-on-quarter terms, unchanged from the March quarter. The composition of inflation was slightly more encouraging in the latest quarter as services inflation eased from 1.4%q/q to 1%q/q - though the annual rate firmed from 4.3% to 4.5%, an elevated pace that will remain central in the RBA's justification to maintain a restrictive monetary policy stance. The major contributors to services inflation in Q2 were international holiday travel (8%q/q) amid peak demand for travel during the northern hemisphere summer; rents (2%q/q) reflecting very tight vacancy rates (but moderated by a government assistance scheme); and medical and hospital services (2.1%q/q) as private health insurance premiums rose.   

Despite a softer services figure, inflation was held up by a few key factors, mainly in the more volatile items. Prices for fruit (10.6%q/q) and vegetables (3.3%q/q) lifted, driving a higher contribution to inflation from the grocery basket than in Q1. Fuel prices - coming off a 1%q/q fall in Q1 - rebounded to post a 1.7%q/q rise that added almost 0.1ppt to quarterly inflation. Clothing and footwear prices rose (3.1%q/q) following discounting during the March quarter, leading to durable goods pushing up on inflation in Q2. Household utilities (water, energy), which also subtracted from inflation in Q1, swung to a positive contribution this quarter (0.8%q/q). 

The overall takeaway from today's report is that there looks to be little basis for the RBA to hawkishly adjust its 2026 timeframe for returning inflation to the midpoint of the target band. The RBA has said it has little tolerance for a timeframe any longer than this, but the risks of that occurring haven't increased on the Q2 CPI numbers. This leaves the Board in a position where it can retain its message of needing to remain vigilant but not needing to hike. 

Preview: Q2 CPI

Australia's long-awaited CPI inflation report for the June quarter is due at 11:30am (AEST) today. Coming ahead of next week's RBA meeting, today's report holds a lot of sway with markets in terms of setting expectations for either the continuation of an unchanged cash rate (4.35%) or a 25bps rate hike. The consensus forecasts are for headline inflation of 1% quarter-on-quarter and 3.8% year-on-year, with core CPI anticipated to print at 1%q/q and 4%Y/Y. 

A recap: Disinflationary progress slowed in the March quarter 

The pace of disinflation in Australia slowed in early 2024 as the key CPI outcomes for the March quarter came in above expectations. Quarterly inflation saw an uptick to 1% in both headline and trimmed mean (or core) terms from 0.6% and 0.8% respectively in Q4 2023. As a result, annual inflation to the March quarter saw smaller declines, with the headline CPI easing from 4.1% to 3.6% while the core rate softened from 4.2% to 4%. 

Higher quarterly inflation was predominantly driven by the services basket. Cost increases in areas such as education costs (5.9%), rents (2.1%) and medical services (2.2%) underpinned a 1.4% rise in services inflation in the quarter. By contrast, goods inflation was a modest 0.5% in Q1. Components that pushed up goods prices included new dwellings, vegetables and pharmaceutical products. This was moderated by declines in furniture, electricity and fuel prices. 

June quarter preview: Inflation pressures remain firm; services prices the key factor

The monthly CPI reports for April and May have indicated that inflationary pressures did not ease up in the June quarter. Based on these reports, the consensus call is that both headline and core CPI will again print at 1% in quarter-on-quarter terms. This would see annual inflation firming from 3.6% to 3.8% for headline CPI and the core rate holding at 4%. Those expectations compare to the RBA's forecasts of 3.8% year-on-year inflation for headline and core CPI in its May Statement on Monetary Policy. 

Services prices - the key unknown going into today's report - have the potential to sway the key inflation outcomes one way or another. Only limited information can be gleaned from the April and May reports given that many services prices used to calculate the quarterly CPI are updated in the month of June. Key price updates will come through on items including utilities (water, electricity and gas), medical and health services, some household services (child care and vets), and financial services. 

At its most recent meeting in June, the RBA Board noted that it needed to '... remain vigilant to upside risks to inflation' and that it was '... not ruling anything in or out' from a policy perspective. Going into today's report, markets assess the chance of an August rate hike to be relatively low at around 30%. An upside surprise in the key inflation outcomes would likely swing the odds in favour of a hike. 

However, I think there is a higher threshold for the RBA to hike. Following today's report, the RBA will revise its inflation forecasts for the Board to consider at the August meeting. In my view, a hike would require the RBA to anticipate a more delayed return to the midpoint of the 2-3% inflation target band than the current view for 2026 or for the Board to judge that there are material risks to that outlook that require a policy response. It does not necessarily follow that upside surprises for Q2 CPI will affect the inflation forecasts over a policy-relevant timeframe. What needs to be considered is the effects of various government subsidies (namely energy bill rebates) that will reduce measured inflation over the coming year. 

Australian dwelling approvals -6.5% in June

Australian dwelling approvals saw their first monthly decline since January posting a 6.5% fall in June (vs -2.5% expected), reversing May's 5.5% rise. House approvals have trended up through the first half of the year - contrasting with unit approvals that remain on the lows for the cycle. 

Dwelling approvals for June saw a 6.5% decline on the prior month, retracing to a 13.2k total. This was the first decline for headline approvals since January; however, despite the recent improvement, approvals remain at very low levels as higher interest rates and construction-related issues continue to impact residential construction activity. Across the June quarter, approvals came in at 40.8k, a 3.9% increase on the March quarter. Within this, house approvals advanced by 6.4% to 27.5k; by contrast, higher-density approvals declined by 1% to just 13.3k remaining on cycle lows. 

Approvals for home alterations lifted by 10.2% in June to $1.2bn, continuing a volatile trend over recent months. Over the June quarter, the value of alteration work approved advanced by 5.8%. Renewed cost increases for materials and labour are likely the driving factor, with the Q1 national accounts reporting ongoing weakness in this activity.