Key insights from the week that was.
The July RBA meeting minutes presented a detailed account of the Board’s deliberations and their assessment of risks. The case presented for raising the cash rate was familiar, centred on the strength of the labour market and upside risks to both wages and inflation. On the arguments to leave the cash rate unchanged – the Board’s eventual decision – it was emphasised that policy was “clearly restrictive” and that the full effect of this stance is still to be seen. That said, highlighting the scale and breadth of inflation risks, the Board again emphasised as they concluded that “some further tightening of monetary policy may be required”. This week’s June labour force survey and next week’s Q2 CPI report will prove critical to the RBA’s August deliberations.
A mark of the economy’s resilience under intense interest rate pressures, the June labour force survey provided yet another robust and well-rounded update on the labour market. Of note, the average pace of employment growth remains virtually unchanged from last year – when Australia’s reopening ‘burst’ was in full flight – and the unemployment rate now sits just 0.04ppts above the cycle low observed in October 2022. The detail also indicates recent job growth has been of high quality.
On inflation, taking into consideration the signal from the April and May monthly CPI indicators, we expect the Q2 CPI report to show inflation materially below peak but still a long way from target. With the labour market tight and unease over inflation expectations lingering, we believe hikes in August and September to a cash rate peak of 4.60% and a length pause to May 2024 is justified. For a detailed view of our Q2 CPI forecast and the likely risks, refer to our Q2 CPI preview on Westpac IQ.
Offshore, the focus was on China’s June data round, European prices, and US’ partial indicators.
The week started with sound 0.8%qtr growth in GDP for Q2 in China, resulting in robust growth over the first half of 3%, 6% annualised. In any other year, this would be an achievement; but, being the first 6 months after COVID-zero, the market deemed it lacklustre. Issues with seasonality and/or a desire to smooth the annual result to compensate for base effect volatility also saw the annual rate come in well below the market’s expectation at 6.3%. The timing of growth through the year now means a year-average gain at or above 5.5% is highly unlikely absent very aggressive stimulus early in Q3. We now forecast year-average growth of 5.2% in 2023 and 5.5% in 2024.
Looking at the partial data for June, industrial production grew 3.8%ytd with chips and EVs adding strength. While in the near term the data is likely to remain volatile given global uncertainties, June’s outcomes should provide businesses with confidence in China’s resilience and the growth opportunities before it in Asia.
Fixed asset investment grew modestly at 3.8%ytd as the property market’s woes continued, property investment falling 7.9%ytd. New home sales growth also slowed from 11.9%ytd in May to 3.7%ytd in June. Retail sales meanwhile point to consumers also becoming more hesitant to spend day-to-day, year-over-year growth to June at 3.1% compared to the year-to-date result of 8.2%. Important to recognise for both property investment and consumption is that households have the capacity to spend but are being held back by a lack of confidence. The provision of additional modest stimulus, sooner than later, should reset their expectations. Our full analysis can be found here.
Over in Europe, inflation continues to force central banks’ hand. Europe’s HCIP decelerated to 5.5%yr in June from 6.1%yr. The easing came as a result of negative contributions from energy (-0.6ppts) and transport (-0.1ppts), and falling contributions from housing, water, electricity, and other fuels (0.6ppts from 0.9ppts). However, demand-side components such as restaurants and hotels, recreation and culture as well as furnishing remain robust. Consequently, core inflation, which the European Central Bank pays close attention to, accelerated to 5.5%yr.
Highlighting the tough task before the ECB in taming above-target inflation, core inflation has exceeded 5%yr since December 2022, and currently around 86% of the CPI basket remains above the 2% target. This points to a risk emerging, not only in Europe, of inflation settling outside the target band. The ECB is set to continue with its planned hike for July. However, another weak reading alongside easing core inflation may allow for a more sanguine view of inflation from the September meeting.
In the UK meanwhile, headline inflation eased to 7.9%yr in June, undershooting expectations of a 8.3%yr increase. This came as a result of a declining contribution from the transport segment, with all other components still buoyant. Underlying figures also point to breadth in inflation pressures, with an unchanged 89% of the CPI basket still growing faster than the 2% target in June versus May. Within the CPI basket, services inflation remains the pre-eminent risk, having accelerated to 7.3%yr – the fourth consecutive lift – with travel and recreation mostly to blame. Given the survey detail, the BoE is unlikely to view this print optimistically, leading to debate over another 50bp hike in August, despite market pricing having eased since the CPI release.
Finally to the US, partial indicators suggest risks to activity are starting to materialise. Retail sales rose 0.2%mth in June, bringing the 3-month average annualised figure to flat. Industrial production came in weaker, declining 0.5%mth, with the weakness among all industry groups except computers and natural gas. Housing also reflected signs of weakness as June’s permits and starts data reversed some of the strength seen in May. Multi-family homes drove the decline for both permits and starts, reflecting hesitancy from builders to commence large projects. Permits point to weakness in the construction industry overall, a concerning outlook given the market is already suffering from a lack of supply, pressuring rents and home prices higher.