Key insights from the week that was.
This week, the RBA’s decision to leave the cash rate unchanged at 3.6% was widely expected, though the associated commentary struck a more cautious tone. The Board’s non-committal stance was echoed by Governor Bullock in the subsequent press conference, emphasising the greater degree of concern over the inflation outlook. This comes after August’s partial inflation data, which raised the risk that the full Q3 reading on underlying inflation may print above the RBA’s previous forecasts. Clearly, the Board is giving itself optionality as it continues to digest the data flow – but with policy still seen as “a bit restrictive”, we continue to expect the next rate cut to be delivered in November, though it is less assured than previously.
Another factor feeding into the RBA’s wariness to upside risks is consumer spending, given growth proved to be “stronger-than-expected” in Q2. However, this week’s household spending data provided more evidence that temporary factors – such as insurance payouts, holidays and discounting – played a significant role, as growth slowed to 0.1% in August following an average monthly gain of 0.5% in Q2. This was further corroborated by recent international trade data, which showed that consumption good imports are tracking a weaker pace over recent months. Growth remains positive even as households move past these one-offs, though the trend in consumer spending may remain ‘bumpy’ as households look toward discounting and sales periods in this early stage of the recovery.
This recovery in consumer spending is a key part of the ‘handover’ of growth from public to private demand, with the former now slowing more clearly. As far as the federal budget’s bottom line is concerned, the final outcome for 2024/25 revealed a better-than-expected cash deficit of $10bn (0.4% of nominal GDP) off the back of elevated commodity prices and stronger company and income tax receipts. Although growth in public spending has slowed recently, the higher level of public spending will see the budget remain in deficit over the next decade.
Before moving offshore, a final note on housing. The latest Cotality (formerly CoreLogic) data pointed to another pick-up in house price growth, lifting 0.9% in September. The combination of firmer homebuyer sentiment and RBA rate cuts to date have played a key role, as evinced by the commensurate lift in housing credit. Tight supply will also have a hand in supporting price growth near-term, with Westpac forecasting a 6% lift in 2025 overall. Looking further ahead, affordability constraints loom as a key risk that could temper price growth, and although recent data on dwelling approvals does not bode well for the front-end of the pipeline, continued progress on the large existing stock of dwelling projects should go some way to alleviating supply constraints medium-term.
Offshore markets once again focused on the US, where negotiations over government spending reached an impasse, resulting in a shutdown. A key implication is the delay of major data releases such as nonfarm payrolls and CPI, as outlined in the Department of Labor’s Contingency Plan. The plan also states that “all active data collection activities for BLS surveys will cease,” raising the risk of data quality issues, the extent of which will depend on the shutdown’s duration.
Elsewhere in the US, the ISM Manufacturing PMI for September rose to 49.1pts. Within the details, the prices component fell 1.8pts to 61.9pts—still well above the five-year pre-COVID average of 55.8pts. The employment index edged up to 45.3pts, signalling a labour market that remains subdued in a “low hiring, low firing” environment.
Across the Pacific, China’s NBS Manufacturing PMI for September was slightly more upbeat at 49.8pts, with most sub-indicators improving. Overcapacity in the manufacturing sector was evident, with strong gains in production (+1.1pts) and inventory (+1.4pts), while output prices fell by 0.9pts. The impact of recent “involution” policies aimed at curbing overproduction has yet to materialise. Conversely, the Non-Manufacturing PMI slipped 0.3pts to 50.0pts, largely due to a 1.3pt drop in prices charged. Weak demand was reflected in declines in activity and new orders. These results strengthen the case for future stimulus measures focused on boosting household demand. China’s next Five-Year Plan (2026–30) will be discussed from 20–23 October, where additional demand-side stimulus could be announced.
