Cliff Notes: Guarded Optimism

Key insights from the week that was.

All eyes were on the long-awaited Q2 CPI in Australia. In the event, the data confirmed that inflation is on track to sustainably return to the centre of the RBA’s 2-3% target range. The disinflationary pulse was clearly on display across the bulk of the consumer basket, with the crucial trimmed mean measure tracking a 6-month annualised pace only a whisker above the midpoint (2.6%yr). The 0.7% gain in headline inflation brought the annual pace down towards the bottom of the band at 2.1%yr, as energy rebates continued to supress electricity prices through the year – note, this dynamic is set to reverse in coming quarters.

Following the Q2 CPI release, Chief Economist Luci Ellis reaffirmed our call for RBA rate cuts in August, November, February and May for a terminal rate of 2.85% — which we see as the lower end of the neutral range. With inflation now clearly on a sustainable path towards the midpoint, the other side of the Board’s mandate – full employment – will become the focus of analysis. This was alluded to in the RBA Deputy Governor’s ‘fireside chat’ this week, with Hauser stating that keeping the economy balanced “won’t be an easy task” and that, if unemployment were to rise sharply, they would “have to react”.

We also received constructive updates on the Australian consumer this week. For retail sales, nominal trade beat expectations, rising 1.2% in June and 0.8% through Q2. However, price growth was the primary support for nominal sales during the quarter, real retail sales rising just 0.3%. The signal from personal credit growth was also promising, suggesting credit card activity may have picked up towards the end of Q2. While it remains to be seen if these outcomes are more signal than noise, following such a lengthy period of disappointment, these outcomes are certainly welcome. For our in-depth take on the health of the Australian consumer, please see our latest Red Book.

Before moving offshore, it is also worth noting that dwelling approvals surprised sharply to the upside in June, up 11.9% (27.4%yr). Most of the heavy lifting was done by the often-volatile private units component, while the more stable private detached houses segment continued to track a flat trend. The outlook remains positive given the promise of RBA rate cuts, a labour market in robust health and housing demand clearly in excess of available supply.

Offshore, the US was the dominant market for both policy and data developments this week.

At their July meeting, the FOMC voted to leave the fed funds rate unchanged, albeit with two dissents – Bowman and Waller preferring to cut. The statement outlined that, while growth moderated in H1 2025, labour market conditions remain solid. Inflation meanwhile “remains somewhat elevated”, running at an above-target rate abstracting from the impact of tariffs. Made clear in the press conference is that while activity growth is positive and the labour market in balance, i.e. the unemployment rate is stable, the majority of the Committee believe it is appropriate to keep pressure on inflation to bring it closer to target.

The FOMC are mindful of the potential for downside risks to compound, however. While US GDP rose 3.0% annualised in Q2, this was primarily the result of a reversal of Q1’s abnormal trade flows to get ahead of the implementation of tariffs. Domestic demand grew just 1.4% annualised through H1 2025, half the average of the prior 10 years. Consumption was weaker still, registering growth of just 0.9% annualised over the first 6 months of the year while housing investment contracted 3.0% annualised. Government demand was flat over the period, and business investment growth weak at 1.9% annualised in Q2 after Q1’s 10.3% annualised surge. If these trends continue, the labour market will weaken further in coming months and the FOMC will be justified in moving closer towards a neutral setting. Note though, because of the presence of structural supports for inflation as well as tariffs, we continue to expect just 50bps of easing in H2 2025 and an unchanged stance thereafter versus the market expectation of around 110bps of easing through to end-2026. We also see the US 10-year continuing to drift higher on fiscal concerns.

Other data released this week was relatively insignificant. And both the Bank of Canada and Bank of Japan kept their policy stance and tone unchanged.

In the Bank of Canada’s messaging, notable was the resilience of Canada and the global economy to the trade uncertainty created by the US. In Canada, trade-exposed sectors have shown weaker demand for labour, but other sectors are in robust shape, seeing excess supply only slowly trend up in aggregate. Ahead, this disinflationary pressure will be judged against the inflationary consequence of tariffs to gauge the appropriate stance for policy. Downside risks for employment and activity will also be closely monitored but, to a degree, have already been protected against by the Bank of Canada returning policy near neutral.

For the Bank of Japan, higher near-term inflation has not shifted their perspective on policy or the known risks to the outlook. FY2025 annual inflation (to March 2026) is now expected to come in at 2.7%yr, up from 2.2%yr. However, being the result of a one-off surge in the price of rice, it is being looked through, with the BoJ’s focus remaining on wage outcomes and their impact on demand-driven inflation. Corporate profit margins are supportive of further robust wage gains, but the uncertainty clouding the global outlook is not. Our base expectation is that the BoJ will remain patient and only raise their policy rate again in March 2026. But we are mindful of their take on the summer bonuses data due late August. If this shows enough promise, and global uncertainty ebbs, the next rate hike could come in January 2026 instead.

Before concluding for the week, it is worth highlighting that the White House continues to announce updated tariff rates for nations across the world, effective 7 August. This week, the administration announced that country’s who have a trade deficit with the US will have a minimum tariff of 10% (Australia included), and those with a trade surplus a minimum rate of 15%. Individual country rates vary significantly though, with recent examples including: Switzerland, 39%; Canada, 35% (excluding USMCA goods); South Africa, 30%; India, 25%; Taiwan, 20%; and Thailand / Cambodia, 19%. Industry tariffs are still be assessed by the administration and there is the potential for retaliation. US trade policy is therefore likely to remain a focus for markets in the weeks to come ahead of clear evidence of the policy’s impact on the US economy – which is likely into Q4.