Key insights from the week that was.
In Australia, the April Monthly CPI Indicator rose 0.8% in the month, leaving annual headline inflation steady at 2.4% – around the mid-point of the RBA’s target band. Being the first month of the quarter, the main updates of interest were on durable goods which are surveyed only once per quarter. There were a few upside surprises here relative to Westpac’s forecast, particularly around footwear, textiles and household contents. The monthly trimmed mean estimate consequently ticked up from 2.7%yr to 2.8%yr, posing some upside risk to our Q2 CPI forecast. As this indicator only provides a ‘partial’ look at inflation, the next two months’ releases are necessary to get a full view.
In the run-up to Q1 GDP next week, we also received two partial indicators of investment.
Construction activity was weaker than expected, holding flat in the quarter to be up 3.5% over the year to March. The main disappointment was the ‘lumpy’ infrastructure segment, down 1.0% in Q1 despite a healthy project pipeline of public sector and renewable initiatives. It was nonetheless encouraging to see residential construction hold to its uptrend, though the current rate of construction is still falling well short of the demands from a growing population. Thankfully, cost pressures look to be easing, suggesting the intense capacity constraints that plagued the sector over recent years are starting to abate.
Private CAPEX also subsequently disappointed, the –0.1% decline in Q1 bringing the annual pace down into negative territory at –0.5%yr. The non-mining sector was the chief culprit behind the weak print (–0.9%), reflecting a broad-based pull-back in equipment spending; the mining sector provided an offset (+1.9%). 2025-26 CAPEX plans continue to capture a subdued outlook for investment, but there hasn’t been a material response to the volatility in the global outlook brought about by President Trump’s trade actions. As detailed in our recent Quarterly Business Snapshot, Australian businesses are well placed overall; and, as discussed in talking about trade, resilient to current global trade uncertainty.
Our Q1 GDP preview will be published later today on Westpac IQ.
Offshore, the US was again the focus in a quiet week for data.
The FOMC’s May meeting minutes showed FOMC members remain confident in the underlying health of the US economy, with economic activity and labour market conditions both characterised as “solid”. Inflation was meanwhile described as “somewhat elevated” and the “significant uncertainties” for inflation and expectations from trade and migration policies called out. There was only limited discussion of the different activity scenarios constructed by staff, and FOMC members views also highlighted the high degree of uncertainty currently present. Staff projections for inflation lifted, but members also noted “significant uncertainty surrounded those effects”. The committee is well aware of the difficult task in managing the dual mandate, noting that “Participants emphasized the importance of ensuring that longer-term inflation expectations remained well anchored… [and that] the Committee might face difficult trade-offs if inflation proves to be more persistent while the outlook for growth and employment weaken.”
Overall, the minutes gave little away in forward guidance or a reaction function to tariff-related impacts on the economy. The FOMC is clearly in ‘wait and see’ mode, which seems appropriate given the uncertainty around bilateral trade negotiations; the potential for tariffs to again be lifted by President Trump; and now the uncertainty over the legal standing of the tariffs themselves, which is to be decided through the appeals process after the US Court of International Trade this week determined President Trump had exceeded his authority with the bilateral tariffs of Liberation Day and those related to fentanyl. President Trump and the administration believe they will win on appeal and President Trump continues to argue the FOMC should lower interest rates without delay, as made clear by reports after the first meeting for this term between President Trump and FOMC Chair Powell this week.
Closer to home, the Reserve Bank of New Zealand cut their overnight cash rate by 25bps to 3.25% in a 5-1 vote. The decision was accompanied by a fresh set of forecasts which showed a lower central expectation for GDP growth. They also showed inflation is expected to peak at 2.7% in the September quarter and decelerate to 1.9% by early 2026. Governor Hawkesby noted the RBNZ would begin the next meeting with “no bias”, insinuating they are not on a pre-set path and will focus on the data between now and then. Most notably, the projected OCR was revised down with the low point for policy rate now 2.85% from 3.10% previously. In light of these views and recent data, our New Zealand colleagues have revised the timing of their call, now expecting the next cut to come in August instead of July.
