Cliff Notes: capacity is paramount
Key insights from the week that was.
In Australia, the latest Monthly CPI Indicator reported an easing in both headline and underlying (trimmed mean) inflation, from 3.8%yr and 4.1%yr in June to 3.5%yr and 3.8%yr in July respectively, broadly in line with expectations. The onset of cost-of-living relief measures were crucial to the latest step-down, as the impact of Commonwealth energy rebates and various state-based measures start to emerge in Queensland, Western Australia and Tasmania. Household electricity prices fell 6.4% in the month, and with policy support to the rest of the states set to follow in August, further declines in electricity prices will be seen in ahead.
As these measures continue to supress headline inflation over the period ahead, the RBA’s focus, from a decision-making perspective, will remain centred on trimmed mean inflation. In a deep-dive earlier this week, we discussed the similarities between our own and the RBA’s view on the likely path for core inflation and the differences on perspectives around wages growth and its implications.
In the run-up to Q2 GDP next week, we also received two partial indicators of business investment.
Construction activity was broadly flat in Q2, lifting just 0.1% higher, although revisions have added roughly 1.3 percentage points to growth in construction of the year to March 2024. The slowdown in private construction activity is still clearly evident, having initially presented via residential construction to now capture non-residential and infrastructure works too. The public sector is providing somewhat of an offset as critical infrastructure projects move into development, following the boost to the pipeline from recent Federal and State Government budgets, seeing construction activity – albeit not growing – remain at a high level.
The Q2 CAPEX survey subsequently reported a significant downside surprise, declining 2.2% in Q2. The decline was centred on building and structures, down 3.8%, while spending on machinery and equipment fell 0.5%, the non-mining sector being the chief culprit behind the weakness across both segments. On spending intentions, the survey suggests that businesses are still certainly looking to invest in order to build capacity and alleviate constraints, but perhaps not to the same degree of absolute confidence that was seen over the past two years. The third estimate for 2024/25 CAPEX plans was up 8.2% compared to the third estimate a year ago which in our view, implies a 6.4% rise in nominal CAPEX spending over the financial year, or roughly 3.25% on an inflation-adjusted basis (versus 5.25% at the time of the second estimate).
Our Q2 GDP preview will be published later today on WestpacIQ.
Offshore, there were few releases during the week but conditions across the manufacturing sector signal weak activity ahead.
In July, durable goods orders rose 9.9%mth rebounding from a decline of –6.9% in June. However, this was driven by the often-volatile transportation category, with ex-transport orders falling –0.2%. Looking ahead to August, the regional Fed surveys point to further downside risks for activity.
The Dallas Fed Index rose to –9.7 index points, the highest since January 2023. That said, it remains around 13pts below its 10-year pre-prenademic average. In the details, the ‘number of employees’ component fell back into the red at –0.7, almost 9 points below the historic average. The sub-components concerning wages, prices paid and prices received all lifted to remain above their historic averages; the latter two, however, suggest some degree of ongoing margin squeeze in the sector.
The Richmond Fed Index fell to –19 index points marking three months of declines. The ‘number of employees’ component fell for both current and expected conditions. This is consistent with other indicators showing emerging softness in the labour market. Manufacturers' hiring decisions reflect the demure demand outlook.
Looking at the broader economy, Q2 GDP was revised up from 2.8% to 3.0% in annualised terms., driven by stronger consumption (2.9% from 2.3% annualised previously). Despite this, annualised Q2 core PCE inflation was revised down a touch from 2.9% to 2.8% annualised. While notable, the revision is unlikely to sway the FOMC from a cut in September. Forward-looking and more timely data still points to downside risks for the labour market and growth.
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