Macro (Re)view (15/4) | Gaining traction

A slight miss on core CPI inflation in the US during the week and expectations for a more frontloaded response from the Fed, with 50bps hikes priced for the next two meetings and the start of balance sheet reduction, saw markets pare back slightly their expected peak for policy rate for this tightening cycle. The RBNZ and BoC are already frontloading their return to more neutral stances with both announcing 50bps hikes. The RBA looks set to start hiking rates in June, while the ECB reaffirmed its gradual path to normailsation. 

Australian labour market continues to tighten

Despite a slowing in employment to 17.9k in March (vs 40k expected) following flood disasters in two major states and the ongoing headwinds from the pandemic, the Australian labour market continues to tighten (full review here). The measured unemployment rate held steady at 4% (vs 3.9% expected), but underemployment (6.3%) and underutilisation (10.3%) declined, with all key indicators at 14-year lows. 

Highly elevated job vacancies point to employment accelerating again that should see labour market conditions tighten further and put upward pressure on wages. There were signs of this in the NAB's March Business Survey that showed a rise in wage costs, though the sense is that the RBA will wait for confirmation in the aggregate wages data for Q1 (due mid May) before starting to hike rates. With March's labour market report coming in softer than expected, it has allowed the expected timing for the first RBA rate hike to stay at June. The anticipation of forthcoming rate hikes and the impact of higher inflation saw consumer sentiment on the Westpac-Melbourne Institute's index extending its recent fall with a 0.9% decline in April, though confidence in the labour market and the economic outlook improved from the prior month and remain at robust levels.     

US core CPI missed expectations  

Key US inflation rates for March showed further increases this week, though for markets well accustomed to upside surprises a below-consensus print on core CPI provided optimism that the peak could be near. The headline CPI rate pushed up from 7.9% to 8.5%yr (vs 8.4% expected), though it was the slower-than-forecast rise in the core rate from 6.4% to 6.5%yr (vs 6.6% expected) that drew the attention of markets. The case for peak inflation relies on a combination of aggressive Fed tightening (including rate hikes and QT) slowing demand and base effects, with a sequence of high monthly readings from last year about to roll into the annual calculation, setting the bar higher for inflation to keep rising.   

Case in point is durable goods, which has been a major contributor to the surge in inflation over the past year driven by very strong demand running up against supply chain pressures. In March, durable goods prices fell by 0.9%, its first month-on-month fall since January last year, easing the annual rate from 18.7% to 17.4%. The main driver was a 3.8%m/m fall in used cars and trucks. Durable goods inflation surged through April-June last year, so if March's reading is any signal, then there could be a notable slowing over the coming months, putting downward pressure on CPI. However, many will point to price rises in components such as food (8.8%yr), housing (5%yr), and energy (32.2%yr) as factors that will moderate a durable goods-driven slowdown in inflation.  

ECB reaffirms timeline to end asset purchases 

Recognition of the surge in inflation to record highs in March led the ECB's Governing Council at this week's meeting to "reinforce its expectation" to wind down bond-buying under its APP program in Q3. The current timeline will see APP net purchases gradually reduce over the current quarter (€40bn in April, €30bn in May and €20bn in June), and barring a severe growth slowdown from the war in Ukraine over the summer, net purchases look set to be brought to a conclusion in Q3. 

In the post-meeting press conference, ECB President Christine Lagarde said that APP net purchases could end any month in Q3, while the guidance for rates to start rising "some time after" the conclusion of net purchases remained intact and could refer to a period anywhere "...from a week to several months". As its stands, the earliest rates could start rising is at the late July meeting. There was also some discussion around a potential backstop facility that could be deployed post-APP to limit yield spreads between countries from widening too severely. The decision statement noted "flexibility in the design and conduct of asset purchases" had been beneficial through the pandemic and President Lagarde said a new instrument could be formulated "in short order" if required.  

UK inflation continues to rise 

Inflation in the UK elevated to new 30-year highs, surprising to the upside of expectations in March as the effects of the Ukraine war flowed through to higher prices for energy, petrol and food. Headline CPI lifted from 6.2% to 7%yr (vs 6.7% expected) and the core rate was up at 5.7%yr (vs 5.3%) from 5.2%. A sharp rise approved by the energy regulator to the base tariff for household energy bills will show through next month, which could test the Bank of England's assessment for inflation to peak at 8% in Q2. This will put pressure on the BoE to tighten policy further (so far it has delivered 65bps of hikes), though it appears unlikely to hike by as much as markets expect through the remainder of the year given its caution around the growth slowdown from falling real incomes signalled in its March decision statement. 

RBNZ and BoC hiked their policy rates by 50 basis points 

High and rising inflation prompted both the Reserve Bank of New Zealand and Bank of Canada to frontload their monetary policy tightening by announcing larger-than-usual rate hikes of 50bps this week, taking their benchmark interest rates to 1.5% and 1% respectively. The RBNZ said it was taking a "path of least regret", accelerating the return to a neutral rate setting to avoid the risks posed to the economy from a prolonged tightening cycle that would be required if high inflation became embedded into expectations. 

The BoC in its latest Monetary Policy Report forecast inflation to rise further above its 2% target on the back of the effects of higher commodity prices and supply chain disruptions stemming from the war in Ukraine; the key inflation forecasts have been revised up in 2022 to 5.3% (from 4.2%) and 2023 to 2.8% (from 2.3%). In addition to hiking rates, the BoC will commence reducing its balance sheet (from April 25) by ceasing reinvestments of maturing bonds.  

Australian unemployment rate steady at 4% in March

Australia's unemployment rate remained at 14-year lows coming in at 4% in March. The flood disasters in New South Wales and Queensland and ongoing pandemic headwinds contributed to a slower rise in employment and fall in hours worked during the month. The labour market continued to tighten and elevated job vacancies should generate more progress in the months ahead, consistent with a June start to the RBA's rate hike cycle. 

Labour Force Survey — March | By the numbers

• Employment lifted by a net 17.9k in March, weaker than the 40k rise expected and well down from February's 77.4k increase.

• National unemployment remained at 4%, slightly falling short of printing at the 3.9% level expected.

• Labour force participation was unchanged at 66.4%. 

• Hours worked declined by 0.6% over the month, with the effects of the flooding in New South Wales and Queensland and ongoing Omicron isolation requirements weakening the momentum from February's rebound (8.9%m/m).  

Labour Force Survey — March | The details

The Australian labour market continued to tighten in March, though employment slowed and hours worked fell due to the flooding disasters in New South Wales and Queensland and the ongoing disruptions from Omicron. Employment slowed to a 17.9k rise on the month, its weakest outcome since October, with full time employment rising by 20.5k but part time employment falling by 2.7k. The floods contributed to employment falling in New South Wales (-0.3k) and slowing in Queensland (8.0k). Victoria also posted a weak outcome (-2.7k).  

Hours worked declined in March (-0.6%m/m) and reflected the disruptions businesses faced from staff absences from the floods and Omicron. The ABS reported that 504k Australians worked fewer hours than usual due to bad weather (or plant breakdown), a surge from the series average of just over 40k per month. Accordingly, the weakness in hours worked was centred in New South Wales (-1.6%m/m) and in Queensland (-2.3%m/m). 

Omicron remains a key factor behind staff shortages, with 577k people working fewer hours due to illness or sick leave; this is down from January's peak (746k) but still very elevated. Media reports over recent days around disruptions to capital city airports in particular in the lead-up to the Easter holiday period suggest Omicron-related absences have remained an issue in April.  

Factoring in the decline in March, growth in hours worked on a pre-Covid comparison eased to 2.1% from 2.7% in February. Growth in employment over the Covid period was little changed at 3% from 2.9%. 

With the participation rate remaining steady at record highs at 66.4%, spare capacity in the labour market was still falling through March despite the slower rise in employment. Note that participation in New South Wales was steady (65.5%) and fell in Queensland (66.6%), likely with some impact from the floods. The share of the working-age population employed has never been higher in the nation's history (68.8%).   

The unemployment rate was posted at 4%, though it just missed printing at 3.9% (it fell from 4.04% to 3.95% taken at two decimal places). Despite the decline in hours worked, both underemployment (6.3% from 6.6%) and underutilisation (10.3% from 10.6%) fell in March. Reported to the standard convention of 1 decimal place, national rates of unemployment, underemployment and total underutilisation are at their lowest since 2008. 

Labour Force Survey — March | Insights

Employment slowed to a 0.1% rise in March on temporary flooding and Omicron effects, but labour demand remains very strong, pointing to stronger employment outcomes, a tighter labour market and faster wages growth ahead. Data for job vacancies out earlier in the week showed a 3.7% rise in March, keeping vacancies as a share of the labour force at very elevated levels. Market expecations for the first RBA rate rise in June look on track.     

Preview: Labour Force Survey — March

The ABS is due to publish Australia's monthly Labour Force Survey for March today at 11:30am (AEST). With the economic expansion accelerating following the Delta setback, employment has surged over recent months driving a rapid tightening in the labour market. Going into today's report, the unemployment rate is on the verge of falling into the 3s and to its lowest since the 1970s. 

As it stands | Labour Force Survey

The labour market continued to tighten in February as employment surged by 77.4k (consensus was for a 37k rise), with more tightening to come given the elevated level of job vacancies. The national unemployment rate fell to its lowest since 2008 after declining from 4.2% to 4.0%, while a rebound in hours worked (8.9%m/m) helped drive falls in underemployment (6.6%) and overall underutilisation (10.6%) to 14-year lows.  Labour supply is responding to the tightening labour market, lifting for the 5th month running to print at a record high of 66.4%.  

Employment has risen at pace since the Delta lockdowns, with February's outcome the 4th above-consensus result in succession. The 77.4k increase followed January's 28.3k rise, which was revised up from 12.9k despite coinciding with the peak of the Omicron wave. Full time employment accounted for all of February's increase (121.9k) as part time employment came off (-44.5k) after its recent surge. On a pre-Covid level comparison, total employment has risen by 2.9% since March 2020, led by full time employment (4.1%) with part time employment modestly higher (0.4%). 

Hours worked rebounded by 8.9% in February from a disrupted opening month to 2022 (-8.6%m/m) when many people were away from work due to Omicron isolation or were taking annual leave. February's rebound lifted hours worked to 2.7% above their pre-Covid level, broadly in line with the rise in employment over the period. The full review of February's report is available here. 

Market expectations | Labour Force Survey

Employment is expected to ease back to a 30k rise in March around a range of estimates from -25k to 60k. The ABS's high frequency payrolls series reported a softening over the month to the reference period for the March survey (-0.6%), which was partly attributed to the effects of the flood diasters in New South Wales and Queensland. 

The national unemployment rate is expected to print with a 3 handle in March, with a decline from 4% to 3.9% anticipated. If achieved, this would be the first time since 1974 that the unemployment rate has fallen below 4%, taking out its pre-financial crisis low in the process. Given its recent momentum, the participation rate may rise further from February's record high of 66.4%. 

What to watch | Labour Force Survey

Rising inflation pressures and a tightening labour market led to a hawkish pivot from the RBA at last week's meeting that indicated the Board was close to raising its cash rate target from its pandemic low of 0.1%. A strong report today would be further vindication for markets and would likely be seen as a green light to move to price in a larger 40bps hike to 0.5% in June. The broader context is that the nation is on the verge of a historic moment with the unemployment rate set to fall to be pressing 50-year lows not even 2 years on from the depths of the pandemic recession that sent the unemployment rate soaring to its highest since the late 1990s at 7.4%.  

Macro (Re)view (8/4) | Stepping up the pace

New insights from the Fed supporting larger rate hikes and a rapid reduction of its balance sheet weighed on risks assets through the week but led to the yield curve steepening after its recent inversion and boosted the US dollar. In Australia, the RBA's hawkish pivot has firmed expectations for a June lift-off in the cash rate. 

RBA looks set to commence hiking the cash rate in June

The RBA left the cash rate unchanged at 0.1% but the patient stance that has guided the Board's messaging on hiking rates since it started the process of removing pandemic policy support in November was retired at this week's meeting, signifying a hawkish tilt with inflation pressures building. Following the earlier withdrawal of the 3-year yield target and winding up of QE, the RBA has been reluctant to move to raising rates in response to higher inflation in the absence of an acceleration in wages growth from a tightening labour market. But with the RBA's inflation forecasts set to be revised higher in May due to the spillover effects from the Ukraine war on petrol prices and supply chains, the Board no longer feels its patient message is appropriate. 

Governor Philip Lowe's decision statement continued to highlight the importance of labour costs picking up to sustain inflation in the 2-3% target band and notes the Board will be watching closely the relevant data "over coming months". In response, the consensus has firmed on June as the timing for the first rate hike, though economists favour a 15bps increase to 0.25% whereas markets are moving to price in a larger 40bps hike to 0.5%. Markets are also more aggressive on their call for where the cash rate will end 2022 at around 2% compared to 1% or just above for economists. For more on Tuesday's RBA meeting see here. Meanwhile, the RBA's semi-annual Financial Stability Review reported many households have built up substantial buffers on their mortgages over the Covid period, though higher debt levels had increased the sensitivity of spending to higher interest rates.  

Australia's trade surplus narrowed in February

A 12.1% surge in import spending led to a sharp narrowing in the trade surplus to $7.5bn in February (reviewed here). Rising imports were driven by consumption goods (16.5%m/m), reflecting the strength of domestic demand conditions, and intermediate goods (16.9%m/m) on the back of higher petrol and input prices. Exports held flat in the month but are expected to accelerate due to the Ukraine war pushing up the prices of the nation's key commodities.  

Also out this week in Australia, retail sales were confirmed to have risen at a solid 1.8% pace in February, led by a 4.8% acceleration in spending across the discretionary categories (reviewed here). The data confirmed that robust spending was still occurring despite the weakening in consumer sentiment measures of late. In the labour market, the latest reading from the ABS's high frequency payrolls index showed a softening over the month to mid-March (-0.6%) but was attributed to the disruptions from floods in New South Wales and Queensland. 

A hawkish Fed outlined its plan for balance sheet reduction   

Recent comments from Fed officials following the mid-March meeting had clearly conveyed the need for a more aggressive policy response to high inflation, with a speech from Governor Brainard early in the week continuing that theme. The hawkish messaging from FOMC members reflected a broad consensus around the Committee table that was revealed in the meeting minutes, published this week. The key developments were that "many participants" would have preferred to commence the rate hiking cycle with a larger increase of 50bps but were held back by the Ukraine war, settling on a 25bps increase instead, while the pace of balance sheet reduction is set to occur at almost double the pace of the previous episode in 2017-19. 

Consistent with earlier post-meeting commentary, the minutes noted "many participants" assessed that "one or more 50 basis point increases" in the policy rate may be needed if inflation pressures "remained elevated or intensified". On the balance sheet, the Fed as part of normalising policy needs to tighten financial conditions, which were being eased by its large-scale bond purchases since the outset of the pandemic. This will be achieved by allowing maturing bonds to roll off its $9tn balance sheet, with the pace of reduction planned to be phased in over a 3-month period (expected to start in May), working up to $60bn/mth for US government bonds $35bn/mth for mortgage-backed securities (MBS). Sales of MBS will be considered later down the track. That plan would equate to $95bn/mth of balance sheet reduction, which compares to a peak pace of $50bn/mth in 2017-19, the only other occasion the Fed has attempted quantitative tightening.  

ECB's Governing Council settled on a compromise in March 

With inflation surging and the Ukraine war denting growth prospects in the euro area, the ECB's Governing Council settled on what was described in the account of the March meeting as a "balanced compromise". The hawkish members had pressed for a "firm end date" on QE sometime in the summer to pave the way for rate hikes in the third quarter so as to avoid the risk of "falling behind the curve" on inflation. However, the doves argued for a "wait-and-see" approach given the uncertainty posed to the economic outlook by the Ukraine war. 

In the end, a more accelerated tapering of QE was announced, though optionality has been retained that could allow for purchases to be extended into the third quarter, while it also altered its guidance for rate hikes by noting they would occur "some time after" the end of QE in an attempt de-link the two. Going into next week's meeting, the acceleration in inflation to record highs for both the headline (7.5%) and core rates (3%) in March will give the hawks more fuel to push for a more aggressive response.   

Australia's trade surplus narrows to $7.5bn in February

Australia's trade surplus narrowed to $7.5bn in February as import spending accelerated and export earnings were broadly flat. A rewidening of the trade surplus looks likely with prices of the nation's key commodity exports elevating following the Ukraine war. 

International Trade — February | By the numbers

• Australia's trade surplus retraced to $7.5bn in February from $11.8bn in January (revised from $12.9bn); markets had expected the surplus to narrow to $11.7bn. 

• Exports edged up slightly (0.2%) to a new record high at $48.8bn (22.3%) following January's 6.1% surge. 
• Imports accelerated by 12.1% in the month to $41.3bn (32.6%yr) after declining in January (-2%m/m).  

International Trade — February | The details

Strong domestic demand conditions and rising prices for many of the goods Australia buys into the country led to a surge in import spending in February (12.1%). Exports were little changed (0.2%) but set a new record high at $48.8bn. Overall, this saw the trade surplus narrow sharply from January, though at $7.5bn it is still at a very elevated level. With the spillover effects from the Ukraine war pushing up the prices of major Australian exports, the trade surplus is set to widen again. 

Total spending on imports accelerated by 12.1% in February, surging to a new record high in the process at a little over $41bn. As the summary table above shows, spending on all categories lifted in the month, but the main contributors were consumption goods (16.5%) and intermediate goods (16.9%). 

February's release reported very strong increases across the full range of consumption goods, broadly reflective of the state of household demand that has been supported by a robust labour market and a large pool of accumulated savings. Month-on-month gains of more than 20% were seen in household electrical items, clothing and footwear and non-industrial transport equipment (mainly cars). While there is an inflation component to these rises to consider, Australian household demand is also very strong. 

The surge in spending on intermediate goods came mainly from processed industrial supplies (28.5%m/m) and fuel (18%m/m), with rising prices likely to have been a major factor. This is ahead of the full impact of the acceleration in petrol prices following Russia's invasion of Ukraine. The war and the recent lockdowns in China have led to further disruptions to global supply chains and will add upward pressure to input prices. 

Australia's export income is running at record highs underpinned by elevated commodity prices, with more upside to come following the Ukraine war. Non-rural goods fell in February (-1.1%) but will be boosted by higher energy and iron ore prices. Rural goods (3.2%) are set to keep rising on the back of demand for Australian grain (of which Ukraine and Russia are major exporters). 

International Trade — February | Insights

The 9% surge in the Australian dollar (trade-weighted index) since the start of February reflects the expectation that the spillover effects from the Ukraine war will be a positive shock for the nation's terms of trade. Higher commodity prices will drive up export earnings and support a rewidening in the trade surplus. The stronger Australian dollar will help to attenuate some of the impact of higher import prices. 

RBA chart

RBA tilts hawkish

The RBA Board left the cash rate target unchanged at 0.1% today, though in a hawkish tilt in the decision statement from Governor Philip Lowe, its patient message on policy has been removed in response to upside risks to inflation. 

The RBA started moving away from its emergency pandemic settings last November when it discontinued its 3-year yield target before bringing QE to an early end in February. The policy rate is the last tool in the sequence to be adjusted and the Board has hinted this could come as early as June, in line with market pricing. 

Since the November meeting, the line from the RBA has been that it will be patient in raising rates, waiting for a tightening labour market to drive wages growth higher to rates consistent with keeping inflation in the 2-3% target band. But the spillover effects from the Ukraine war (particularly on petrol prices) and ongoing supply constraints mean the RBA will be revising higher its inflation forecasts in May's quarterly statement. Currently, it expects inflation to peak in Q2 at 3¾% on the headline rate and at 3¼% on the underlying measure.

Although upside risks attend the inflation outlook and the labour market has made faster progress toward full employment (and further tightening is still expected) than the RBA had forecast, the indications from today's statement are that upward pressure on wages will remain a gradual process. This is also from a weak starting point, with the governor pointing out that labour costs are running below a pace consistent with delivering sustainable 2-3% inflation. These could be interpreted as signs of pushback to very hawkish market pricing that sees the cash rate rising to 1.75% by year-end.

With the patient reference removed, the main message in the final paragraph of the governor's statement was that the data on inflation and labour costs "over coming months" would be key. The statement was closed out by giving greater prominence to the inflation side of the RBA's mandate, broadening the recent focus of policy that has been centred on achieving full employment. 

Preview: RBA April meeting

Going into today's meeting, a patient RBA remains in contrast to markets expecting rates to start rising as early as June. Governor Philip Lowe's decision statement at 2:30PM (AEST) will be closely watched for any shift in tone from the Board, but it is likely the RBA will continue to lean against hawkish market pricing and leave the cash rate target unchanged at 0.1%.    

Domestically, the key developments are in the labour market where the unemployment rate has fallen to its lowest since 2008 at 4% and conditions are likely to tighten further given the elevated volume of job vacancies. Wages growth has been slow to respond and is currently only in its range in the years prior to the pandemic when inflation consistently ran below the RBA's 2-3% target band. 

However, in the March meeting minutes, the Board made the important observation that with the labour market expected to keep tightening, its outlook for wages growth was "skewed to the upside". The main uncertainty is the pace at which low unemployment feeds through to faster wages growth and, in turn, inflation. With this yet to be materialised in the data, the RBA has been reluctant to conclude that the recent return of underlying inflation to the midpoint of the target is sustainable, keeping the focus on achieving full employment.   

Markets are sending a much more definitive message, priced for the first hike (a 15bps move to 0.25%) to come in June and to then be followed by 6 more hikes over the remainder of 2022, taking the cash rate to 1.75%. Then there is the extraordinary repricing that occured in the bond market over Q1 as global inflation concerns intensified following the Ukraine war, ramping up expectations for policy tightening by central banks. In Australia, the 3-year AGS yield surged by around 130bps over the quarter to 2.3%; it was only in November when the RBA abandoned its 0.1% target at this segment of the curve.     

However, with inflation pressures in Australia much more subdued than in major economies offshore and wages growth yet to accelerate, the RBA is likely to reaffirm today its patience in monitoring developments.

Australian retail sales rise 1.8% in February

Australian retail sales continued to advance in February after a resilient showing during the Omicron wave in January. Discretionary sales lifted strongly to drive a 1.8% increase in headline sales in February. 

Retail Sales — February | By the numbers 

• National nominal retail sales advanced by 1.8%m/m in February to $33.1bn, in line with the preliminary estimate and up from January's 1.6% rise (revised from 1.8%). 
• 12-month retail sales lifted from 6.3% to 9.1%. 

Retail Sales — February | The details  

Australian retail sales posted another solid rise to be up 1.8% in February after a resilient 1.6% lift through the surge of Omicron in January. This took the gain in retail sales to 3.5% over the opening two months of 2022, a significantly stronger start to the year than in the comparable period in 2021 (0%). Overall, retail sales in February were 9.1% higher over the year and were 19% above their pre-pandemic level. 

Non-food or discretionary sales elevated from January's 1.3% rise to post a strong 4.8% gain in February. The standout categories were clothing and footwear (11.2%) and department stores (11.1%), with both rebounding after pulling back from November's record highs. Turnover at cafes and restaurants accelerated (9.7%) as Omicron concerns subsided. This also weighed on online sales (-3.8%) that had surged in January (6.7%) when rising caseloads saw many Australians either in isolation or staying away from the shops. February's decline in food sales (-2.6%) was driven by a fall in supermarkets (-2.6%).      

Retail sales growth picked up pace from the month prior in most states, consistent with an easing in Omicron. The strongest outcomes were seen in New South Wales (from 1.1%m/m to 3.9%m/m), ACT (0.5%m/m to 2.2%m/m) and Queensland (0.4% to 1.5%m/m). However, sales deteriorated in both Western Australia (4.4% to -2.9%) and Northern Territory (1% to -3.8%) as Covid started to spread more widely than it had throughout the pandemic.  

Retail Sales — February | Insights

Australian retail sales have made a strong start to 2022 despite the presence of Omicron. This has also come alongside a weakening in measures of consumer sentiment. Some of this strength in retail sales is likely to be attributable to higher inflation, though factors such as a tight labour market and high accumulated savings would also be helping to drive robust consumer demand.  

Macro (Re)view (1/4) | Diverging paths

Central bank divergence was a key theme in markets over the past week. US data was consistent with expectations for 50bps rate hikes from the Fed, while in Europe officials at the ECB remained cautious as inflation lifted to record highs and in Japan the BoJ pledged to ramp up bond-buying in defence of its yield curve control policy. Domestically, the focus was on the federal budget while the RBA will have its say at next week's meeting.  

Fiscal support was maintained in the Australian Federal Budget... 

A stronger-than-expected rebound in the Australian economy from the Delta wave lockdowns and surging commodity prices created headroom for the government to deliver more fiscal stimulus in its 2022/23 Budget. Higher forecast government revenues have been used to fund $26.1bn of new stimulus through to 2022/23, centred on cost of living support including reduced fuel duty, one-off payments and tax relief with the inflation outlook lifting well above the pace of wages growth in the near term. 

However, despite these headwinds and unlike many other countries facing downside risks to growth, the GDP growth outlook in Australia was revised up, with the pace seen running well above trend in the current financial year (4.25%) and next (3.5%) on the back of robust household consumption. That is underpinned by a labour market expected to keep tightening with the unemployment rate falling into the 3s in 2022/23. 

By keeping fiscal support going, the budget measures will help in sustaining the current momentum in the economy. With the recovery from the pandemic secured and with a robust outlook in place, the government plans to gradually withdraw fiscal support, reflected in an $84.2bn improvement in the cumulative deficit to 2025/26. Full analysis of the Budget is available here  

...as economic conditions remain strong 

Data released this week was robust overall, indicating the Australian economy had quickly brushed aside the effects of Omicron. National job vacancies lifted by 6.9% for the 3 months to February, resetting to a new record high at 423.5k, equivalent to 3% of the labour force and up 86% on a pre-Covid level comparison. Labour demand is broad based across the economy and advanced further over the latest period in business services (6.9%), household services (3.7%) and in the goods-related sector (5.2%). With participation already at record highs, the labour market is tight and an unemployment rate sitting at 4% is set to keep falling. The feed-through to wages and inflation is the key issue in focus at next week's RBA meeting.

Building approvals rebounded at multiples of the expected rise posting a 43.5% increase in February after a disrupted start to 2022 (reviewed here). Higher-density approvals in Sydney and Melbourne have shown a lift in momentum of late. Housing finance commitments declined unexpectedly in February (-3.7%), likely reflecting the slowdown from Omicron and the summer holiday period (reviewed here). However, CoreLogic reported conditions in the housing market are starting to diverge, with prices declining in Sydney and Melbourne but rising in the other capitals in March. A broader slowdown in the housing market shapes as likely through 2022 as affordability concerns, increased supply and expected interest rate increases take hold.  

A tightening US labour market pushes wages higher...

A solid March nonfarm payrolls report reflected further tightening in the US labour market, leading to upward pressure on wages. Employment increased by 431k on the month and while that missed expectations for a 490k rise, there was an upward revision of 95k made to payrolls over January and February. Rising employment more than offset an uptick in the participation rate to 62.4%, driving a fall in the unemployment rate from 3.8% to 3.6% and pushing the broader underemployment rate down from 7.2% to 6.9%, with both measures at their lowest since the onset of the pandemic. Further declines can be expected with there being almost 11.3 million job openings still to be filled. With demand for labour strong, growth in average hourly earnings lifted from 5.1% to 5.6%Y/Y. 

...as inflation keep climbing  

Key US inflation measures saw further increases in February. The headline PCE inflation rate was up at 6.4%Y/Y (from 6%) and the Fed's preferred underlying measure firmed to 5.4%Y/Y (from 5.2%) on the back of a 0.4% rise in February. Trimmed mean PCE inflation (an alternative measure that removes the most volatile price movements) was at 30-year highs ticking up from 3.5% to 3.6%Y/Y. February marked 12 months since the start of the acceleration in price pressures, meaning that the hurdle for inflation to keep rising now becomes higher. One of the major drivers of inflation over the past year has been durable goods (11.4%Y/Y), though it came in flat in February for its weakest month-month reading since November 2020 and this component will be a key one to watch.  

Euro area inflation hit record highs in March

The spillover effects from the Ukraine war were in full flow with the flash estimates of euro area inflation breaking out to new record highs in March. Headline inflation surged from 5.9% to 7.5%yr (vs 6.7% expected) as both energy (44.7%yr) and food prices (5%yr) accelerated in response to disrupted supply chains. 

There is likely to be more upward pressure coming through the pipeline to consumer prices with the war continuing to unfold, while the lockdowns in China will disrupt trade further. Communications from ECB officials this week, including from President Christine Lagarde and Chief Economist Philip Lane, reflected a cautious approach to policy amid a highly uncertain outlook. Optionality and flexibility were reiterated as key given the upside risks to inflation and downside risks to growth. But markets have largely looked past these messages and are priced for rates to start rising later in the year.