Key insights from the week that was.
Australian consumer prices fell 0.7% in May, bringing the annual rate of headline inflation down from 4.2%yr to 4.0%yr. The main cause of the decline was an 11.9% fall in auto fuel prices; but, relative to our own forecast, it was holiday travel and accommodation that was the primary contributor.
Stripping out these factors, trimmed mean inflation lifted from 3.4%yr to 3.6%yr. Housing inflation was, once again, key with rents surprising to the upside and new dwelling costs recording their strongest monthly increase since late-2022. The latter contrasts with growing evidence of cooling demand in the housing market, pointing to margin pressure for homebuilders. Cost pass-through was also evident in the detail, though weak household spending may stop businesses from recouping costs through mid-year and beyond. The abrupt reversal in energy supply and prices through June (see below) may also see businesses write off margin compression as a transient concern.
Employment subsequently bounced back from holiday-related weakness in April as expected, jobs up +40.3k and the unemployment rate ticking down to 4.4%. That said, revisions to April offset May’s gain, stalling growth in Q2-to-date after a robust Q1. Looking past the month-to-month volatility, the unemployment rate trend is starting to edge up, in line with our expectation for a sustained softening.
Offshore, the past week saw the Memorandum of Understanding between the US and Iran take effect and a consequent rapid opening up of the Strait of Hormuz, freeing circa 20 million barrels of oil from the Strait in recent days. For the most part, the price of oil has trended down, reaching USD72 mid-week, a level last seen before the conflict began in February. It has not been all smooth sailing, however, an attack on a commercial ship off the coast of Oman overnight sparking concern and an increase in the oil price back above USD75. Several points still require detailed negotiation, including Iran’s nuclear program and the management of the Strait beyond the first 60 days. Discussion on a framework to resolve differences on these matters began at the weekend in Switzerland, and are likely to continue for weeks, if not months. Risks for energy supply and price will therefore linger for the foreseeable future.
On the data front, US personal income surprised to the upside in May, rising 0.7% after being unchanged in April. Compensation growth was more modest at 0.4%, consistent with the average since the beginning of the year. Personal spending growth also accelerated to 0.7%, although much of the gain was driven by inflation, with real spending up just 0.3% after a flat April print. PCE inflation was a touch softer than expected in May at 0.4%, while core inflation was in line at 0.3%. Q2 is therefore looking like another soft period for the US consumer. Notable too is that revisions have been against the consumer, the third estimate of Q1 GDP this week seeing quarterly consumption growth revised down to just 0.5% annualised. An upgrade to business investment and a material reduction in import growth in the quarter more than offset for GDP; but being more than 70% of the economy, the weakness in consumption will have a significant bearing on the aggregate pulse hence.
In our view, this data and events in energy markets warrant the FOMC remaining on hold for the remainder of the year as inflation risks slowly abate. However, the market is likely to continue to price the risk of further tightening, particularly while the White House remains out of the monetary policy debate and AI optimisim persists.
