Key insights from the week that was.
After reviewing last week’s National Accounts, we revised our RBA call, reinstating a 25bp November rate hike. Domestic demand is proving more resilient than we had anticipated, buoyed by stronger household incomes and a large pipeline of data centre and renewable energy investment, limiting the pace of disinflation.
Markets are pricing in a circa 80% chance of a September rate hike, but we believe the Board will prefer to wait for confirmation from the full quarterly inflation data and its revised forecasts. Our own forecast updates will be published in our September Market Outlook later today on Westpac IQ.
This week’s sentiment surveys also served as a reminder that downside risks to growth are still present in Australia.
Westpac-MI Consumer Sentiment buckled in September, the 5.2% decline to 84.4 unwinding much of August’s gain and leaving sentiment near the pessimistic lows of early-2026.
Cost-of-living pressures clearly remain front of mind, highlighted by the 9.2% drop in ‘family finances vs a year ago’. The recent rebound in fuel prices, renewed concerns about inflation’s persistence and anxiety over the need for additional monetary tightening all weighed heavily in the month. These concerns, alongside the downbeat assessment on housing markets, also produced a more pessimistic reading on broader economic conditions, with both the one-year and five-year ahead measures down 4.0% and 4.5% in the month.
Businesses are hardly brimming with optimism either, the August NAB business survey reporting that business confidence slipped further into negative territory to –8 in August. Conditions also fell 5pts to –1, the weakest reading since the pandemic.
Weaker profitability was the chief culprit behind the decline, slumping to its lowest level in years as firms grapple with softer demand, higher interest rates and elevated input costs. Indeed, gauges of purchase costs and labour cost growth continue to run at above-average levels, and trading conditions have weakened to cycle lows. As for the consumer, downside risks persist for business.
Offshore, the flow of data was light ahead of last night’s ECB meeting and tonight’s US CPI update.
Data for the Euro Area was constructive early in the week, GDP growth revised up from 0.4% to 0.6% in the third estimate for Q2, taking the annual rate up to 1.2%yr. In the quarter, household consumption showed strength, up 0.4%, and government expenditure lifted 0.2%. Business investment was a partial offset, edging down 0.1%. Employment also continued to edge up in Q2, maintaining full employment and indicating marginal labour supply is available to meet demand.
The US PPI subsequently met expectations in August, growth accelerating from a revised 0.1% (prev 0.0%) in July to 0.4%. Excluding food and energy, growth was a touch weaker than expected at 0.2%, offset by a 0.1ppt upward revision to July to 0.3%. Annual PPI inflation accelerated to 5.4%, or 4.6% excluding food and energy.
Coming after last Friday’s above expectations August nonfarm payroll release, in which 162k new positions were reported along with 55k in back revisions to June and July, and given the latest surge in the price of oil, the August PPI result further solidified the market’s concerns over inflation risks, the US 10-year ranging up to just below 5.0% as a result. At the short end, participants are now debating whether to price in a fourth hike by the FOMC over the coming year, with three 25bp increases fully priced by April.
As expected, and unsurprisingly given the above data and market developments, the ECB then delivered a 25bp hike at their September meeting. The risks were characterised as skewed towards prices, with inflation “to remain well above target for an extended period” primarily as a result of the effect on energy prices of the Middle East conflict and the Russia / Ukraine war.
The “new ECB staff projections sees headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028”. “For inflation excluding energy and food, the baseline foresees 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.” These forecasts are unchanged for 2026, but higher in 2027 and 2028 than in June. Despite the persistence in inflation and need for tighter policy, the ECB remains constructive on the growth outlook. “The baseline projection for economic growth is 0.9% for 2026, 1.4% for 2027 and 1.5% for 2028. This is an upward revision for both 2026 and 2027, mainly reflecting the greater than expected resilience of the euro area economy.”
The Governing Council is acutely aware of the uncertainty and risks ahead, and are committed to determining policy meeting by meeting. From their guidance, it is clear the Council are comfortable with their current position and capacity to adjust policy in real time to meet their medium-term mandate.
