Cliff Notes: AI Goes From Strength to Strength

Key insights from the week that was.

Australia’s main market event this week was the April CPI which came in slightly below consensus on a headline basis (0.4%, 4.2%yr). Volatile, policy-driven components related to travel drove the outcome – the Federal Government’s temporary halving of fuel excise and some state governments offering free public transport, while cancelled flights and refunds for holiday travel provided a partial offset. These dynamics were also the main factors behind household spending’s April decline.

Trimmed mean inflation meanwhile met expectations (0.3%, 3.4%yr). Pass-through of higher fuel costs is evident in some areas – home-building costs registered its strongest monthly gain since November 2023. However, the pass-through is not unfolding as rapidly as we initially feared. While April’s outcome will give the RBA space to pause and assess in June, the risk of a larger and faster pass-through in coming months is material. We believe the RBA will feel compelled to resume raising the cash rate in the second half of the year as these risks crystalise.

In the run-up to Q1 GDP next Wednesday, we also received two partial indicators for investment.

Construction activity rose 3.4% in Q1, pushing annual growth to 6.3%yr. This outsized gain was mostly driven by a large mining infrastructure installation in WA – lumpy completions like these have a much smaller impact on National Accounts estimates which are reported on an accrual basis. Activity was weak elsewhere, residential construction dipping 0.6% despite a solid project pipeline, and public infrastructure works trending lower, down –3.2%.

Private CAPEX subsequently surprised to the upside, surging 6.5% in Q1 to be up 14.6% over the year. Data centres were responsible for almost all the increase: machinery and equipment spending in the information and telecommunications sector almost tripling (+196%) in Q1 alone. It should be noted that the net impact on GDP will be limited given the high import component of the data centre build-out. The second estimate of 2026/27 CAPEX plans provided an upgrade; adjusting for inflation, real investment intentions remained resilient as the Middle East conflict began.

While these headline estimates have their caveats, the underlying detail suggests there is some modest upside risk to Q1 GDP. Our preview will be published later today on Westpac IQ.

This week’s offshore data provided little fresh signal and, for the market, paled in significance to perceived progress towards a truce in the Middle East. Intermediated negotiations between the US and Iran continued throughout the week despite several US strikes on Iranian military assets in the Strait, which were perceived to be active threats to shipping and dealt with. The successful transiting of several ships was instead focused upon as evidence to an end to the conflict was near. Having tested the top of 2026’s range early last week, circa US$110 per barrel, the price of Brent crude has since fallen to around US$94.

As we go to press, reports suggest a 60-day ceasefire has been agreed to by the US and Iran, but this time it includes a full resumption of shipping through the Strait within a month. The intent is to allow supply of energy and other goods to resume, alleviating stress on the Iranian and global economy, while negotiations continue over Tehran’s nuclear program. President Trump still needs to agree to the deal, however. And, further ahead, while November’s US mid-term elections will, if necessary, arguably warrant an extension of the ceasefire to year end, the complexity and significance of the nuclear negotiations could see the conflict flare again in 2027. For the foreseeable future, the price of oil and downstream margins are likely to depend not only on the current balance of physical demand and supply, but also a heightened awareness of political risk.

Of this week’s US data, releases related to the consumer were most notable. The second estimate for US GDP was revised down from 2.0% annualised to 1.6%, in large part due to weaker consumption growth. At 1.4% annualised, the current consumer pulse is well below the historic trend circa 2.5% and looks to be entrenched – real personal consumption up just 0.1% in April as wage growth failed to keep pace with inflation (0.2%). Housing is also clearly under pressure, S&P Cotality house prices falling for a second consecutive month (-0.2%, +0.8%yr), and new home sales down 6.2% in April after March’s gain was halved from 7.4% to 3.4%.

FOMC members prioritising inflation risks is notable given the subdued pulse for housing demand. While market participants have been debating the probability of a fed funds rate hike(s) over the coming year, for activity it is the implications for the long end of the yield curve that matter most. The FOMC may find they do not need to hike, as we currently forecast, because inflation risks and fiscal uncertainty result in a modest uptrend in the US 10-year yield. Since mid-April, the US 10-year has risen as much as 40bps to 4.67% because of these factors. Now at 4.44%, we see it rising to 4.75% by mid-2028.