Cliff Notes: the promise of detail
Key insights from the week that was.
In Australia, Westpac-MI Consumer Sentiment rose 2.2% to 92.1% in May, representing a partial rebound from a subdued result in April that partly captured President Trump’s ‘Liberation Day’. There have been many developments on the global trade front since – especially the latest de-escalation between the US and China which came just after our latest survey – which, combined with the calm attitude of financial markets, have supported sentiment. This was clearly captured in views on ‘family finances vs a year ago’ which rebounded +7.0% and, to a lesser extent, the year-ahead outlook for economic conditions, up +2.8%.
Consumers are accordingly less downbeat on whether it is ‘time to buy a major household item’, up +3.5%; however, that the sub-index remains 25% below its long-run average emphasises the weak starting point for the nascent recovery in consumer spending after a prolonged period of real income declines over 2023/24. On that front, the latest wages data struck a more positive tone for households, with the wage price index rising 0.9% (3.4%yr) in Q1. This was slightly firmer than expected and came as a result of wage increases delivered to aged care and childcare workers.
Households also remain positive on the labour market outlook, a view that was certainly given justification by the latest labour force survey. Following a couple of months of softer outcomes, employment surprised materially to the upside with an +89k surge. This also came alongside a significant rebound in the labour force, seeing the employment-to-population ratio and participation rate bounce back toward their historic highs. Meanwhile, the unemployment rate was little changed at its current year-average of 4.1%. Broadly, labour demand and supply still look to be moving broadly in tandem, allowing measures of labour market slack to hold steady.
Overall, this week’s data does not change our view that the RBA will deliver a 25bp rate cut at its policy meeting next week, but it will be interesting to see refreshed staff forecasts and the Board’s framing of risks around the domestic and global outlook. We note that the latest NAB business survey highlighted businesses were broadly unphased by the US’ tariff uproar, supporting the view that Australia remains well placed to weather this period of global uncertainty. And, as far as the latest US-China trade deal is concerned, this week’s essay from Chief Economist Luci Ellis discusses the implications in more depth.
Offshore, investors were focussed on the short-term trade deal agreed between the US and China. Tariffs imposed on Chinese exports were reduced to 30% (combining a 10% reciprocal rate and 20% tariff for fentanyl supply), while China will tariff US goods by 10%. These rates will be in place for 90 days from 12 May during which time the leaders of both countries will seek to negotiate a more permanent trade agreement. Industry tariffs also remain in effect for Chinese imports to the US, as is the case for other nations.
On the data front, the US CPI printed below expectations at 2.3%yr in April, the lowest rate since February 2021. Annual core inflation held steady at 2.8%. The detail of the April report was mixed, food prices edging higher as energy posted a partial rebound (a 0.7% gain after March’s 2.4% decline). Within the core basket, goods prices edged higher again (up 0.1% in the month and over the year). Services inflation meanwhile remained robust at 0.3%, 3.6%yr (ex energy). Shelter inflation (primarily rents) continues to track materially above average, a consequence of limited supply; but medical care services also saw an outsized gain 0.5% compared to its current annual pace of 3.1%yr. Overall, ahead of the impact of tariffs, the baseline for inflation in the US looks to have been inflation modestly above target, primarily as a result of constrained supply. This is not a trend that the FOMC can easily influence; but, as tariffs also impact, it will give the FOMC cause to be cautious over inflation expectations and risks.
FOMC members who spoke this week certainly supported a ‘wait and see’ approach to monetary policy. Although, it has to be noted, they are assessing the labour market as closely as inflation. We maintain our call for two rate cuts towards the end of 2025 and an on-hold stance through 2026 while awaiting a clearer read on the net effect of US domestic and trade policy.
In the UK meanwhile, the latest labour market data gave justification for the Bank of England to continue to ease through 2025. The three-month average pace of employment growth slowed to 112k in March, down from 206k in February; and the unemployment rate edged up from 4.4% to 4.5%. Annual growth in average weekly earnings decelerated from a revised 5.9%yr ex-bonus to 5.6%yr (3-month average basis). This deceleration in wages aligns with other survey indicators which indicate wage growth is unlikely to be a source of inflationary pressure over the coming year.
While there may be greater concern over US growth these days, for both the UK and Euro Area, the outlook is becoming brighter. UK GDP growth was strong as expected in Q1, gaining 0.7%, 1.3%yr. This is despite soft private consumption (0.2%) and a contraction in government spending (-0.5%), more than offset by a surge in business investment (2.9%) as export growth outpaced imports (3.5% versus 2.1%). The second release for Q1 Euro Area growth confirmed robust moment, quarterly growth edged down from 0.4% to 0.3% but the annual rate unchanged at 1.2%yr – around trend.
The balance of growth prospects between the US, UK, Europe and, further afield, Asia will have a material bearing on the outlook for financial markets. Current trends point to persistent downward pressure on the US dollar, as discussed recently in our May Market Outlook.
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