Key insights from the week that was.
This week’s RBA minutes provided more colour around the Monetary Policy Board’s (MPB) June deliberations. Overall, the MPB views the economy as “operating with excess demand and widespread inflationary pressures”. On the domestic front, there were “somewhat differing views” among MPB members regarding the extent of current capacity pressures, but they are nonetheless seen as elevated and a risk to the normalisation of inflation towards target. On the Middle East conflict, the MPB welcomed progress towards a resolution but still viewed the balance of risks as firmly skewed to the upside for inflation and the downside for growth. As such, “increasing the cash rate target” will be considered if required.
Last week’s speech from Deputy Governor Hauser shed more light on the RBA’s thinking on the relationship between inflation and unemployment. The main takeaway is that inflation tends to be more sensitive when the economy is already tight; but equally, that the policy trade-off in such a situation allows more scope to focus on bringing inflation down without a large cost to employment. These judgements underscore the RBA’s successive rate hikes earlier in the year and their subsequent decision to pause and assess in June.
The RBA is also closely monitoring trends in the housing market and the implications for wealth and consumption. Cotality’s latest home value index fell 0.4% in June, Sydney and Melbourne’s correction deepening as price growth slowed from a higher base across the smaller capitals. Together with signs of slowing credit growth, evidence that the RBA’s rate hikes and sentiment are weighing on the market is mounting. Westpac is forecasting further house price declines through the remainder of the year, though strong population growth and tight supply will limit their scale.
Before moving offshore, a final note on trade. The goods trade balance surprised materially to the downside in May, flipping from a surplus of $1.4bn to a deficit of $3.0bn, the largest in over a decade. Volatility in gold flows was one of the chief culprits, accentuated by a surprisingly large fall in iron ore exports and a solid lift in car imports (i.e. EVs). Imports of equipment related to the data centre build-out have moderated but are still well above historical norms. Expect continued volatility over the coming year(s).
Over in the US, nonfarm payrolls disappointed in June, with only 57k jobs created and April/May revised down by a combined 74k. The three-month average is now 111k versus 164k in May, though June’s result still suggests labour demand is at least keeping pace with supply. Household survey employment is materially weaker, however, declining 507k in June and averaging a loss of 195k jobs per month over the past three. Further, continuing the trend of the past 18 months, the participation rate fell to 61.5% in June; had participation held steady since January 2025, the unemployment rate would now be above 5%, not the reported 4.2%. Taken together, these outcomes imply the labour market is most likely marking time. That said, the downside risks the household survey allude to are worth close attention.
Also consistent with the FOMC becoming less concerned with inflation in coming months was the latest ISM manufacturing report. Most notably, the prices component fell 9.1pts to 73, signalling a turn in upstream price pressures. Together with the decline in oil benchmarks in recent weeks and the available detail of both the CPI and PPI, which have offered little evidence of material secondary inflation effects from the Middle East conflict, this moderation should alleviate concerns amongst the FOMC that a sustained re-acceleration in consumer inflation is a probable risk.
The preliminary release for June Euro Area inflation was also supportive of an increasingly benign inflation outlook, prices falling 0.1% versus a 0.1% expected gain. The improvement was broad based too, annual headline inflation moderating to 2.8%yr from 3.2%yr and core inflation to 2.4%yr from 2.6%yr. Importantly, this was achieved while the labour market remains historically tight.
FOMC Chair Kevin Warsh picked up on this improvement in inflation prospects at the ECB’s Sintra Forum on Central Banking, highlighting that inflation expectations and risks “have come down” in recent weeks. Admittedly he is focused on the US but, per the Euro Area data above, the narrative is broadly true for developed economies across the northern hemisphere. The keynote panel at the conference also discussed several other important topics including the need for greater flexibility and timeliness when conducting monetary policy, how AI advances are being factored into decision making and the importance of safeguarding financial stability.
Finally to Asia where the Q2 Tankan was received positively, participants focusing on the increase in large manufacturer sentiment from 17 to 22. Other outcomes were less positive, however. Smaller manufacturers are more cautious, as are service firms. R&D expectations were also revised down, and profitability and labour market indicators came under pressure. Overall, the survey suggests the BoJ needs to keep evolving risks in mind as they continue to normalise policy.
 June deliberations. Overall, the MPB views the economy as “operating with excess demand and widespread inflationary pressures”. On the domestic front, there were “somewhat differing views” among MPB members regarding the extent of current capacity pressures, but they are nonetheless seen as elevated and a risk to the normalisation of inflation towards target. On the Middle East conflict, the MPB welcomed progress towards a resolution but still viewed the balance of risks as firmly skewed to the upside for inflation and the downside for growth. As such, “increasing the cash rate target” will be considered if required.){kind=link}