Cliff Notes: dynamic risks
Key insights from the week that was.
In an 8-1 vote, the RBA Monetary Policy Board (MPB) delivered its third consecutive rate hike, raising the cash rate by 25bps to its prior peak of 4.35%. The MPB stated that “the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices” and that “this is likely to have second-round effects on prices for goods and services more broadly.” Inflation is now expected “to remain above target for some time”. The MPB are also attune to the risk of “price rises get[ting] built into longer term inflation expectations” in the event of a longer, or more severe, conflict.
In a video update midweek, Chief Economist Luci Ellis noted that Governor Bullock’s press conference was a bit more dovish than we had anticipated, with the last three hikes framed as giving some space for the MPB to assess how the risks evolve. That said, the staff’s forecasts – which are predicated on an assumption of around one-and-a-half more rate hikes – have underlying inflation peaking at 3.8%yr in Q2 2026 and not returning to target until the end of its forecast horizon at June 2028. Inflation risks are firmly skewed towards a higher peak and potentially a slower return to target. We therefore continue to expect another two rate hikes from the RBA in coming months. But, given Governor Bullock’s somewhat more cautious tone, we admit the case for June is now more finely balanced.
Rate hikes already look to be having an effect on the housing market, with national dwelling price growth slowing from a monthly pace of 0.6% in January to 0.2% in April. Performance across the capital cities is mixed, with prices down in Sydney and Melbourne prices but still rising in Brisbane, Adelaide and Perth. While a firming uptrend for dwelling approvals bodes well for supply, cost pressures stemming from the Middle East conflict will likely cause delays and some second thoughts on projects planned but not commenced.
Trends across other parts of the economy are also starting to shift. The ABS’ nominal household spending indicator bounced 1.6% in March on account of higher fuel costs, mirroring our own consumer card activity data. Abstracting from price effects, we expect real consumption to gain 0.6% in Q1; however, outside of fuel and electricity (buoyed by the rebate roll-off), the spending pulse looks faint. This speaks to the more challenging economic outlook taking hold across the nation, particularly in non-mining states where revenue constraints and higher expenses provide less scope for fiscal support.
Before moving offshore, a final note on trade. Unlike the shocks of recent years which benefitted Australia’s net trade position, recent data revealed the nominal goods trade surplus buckled into deficit in March for the first time since 2017. Higher fuel import costs (+37.4%) and volatility in gold played important roles. But the chief culprit behind the surprise was a remarkable surge in data processing machine imports, up $2.9bn or 300% in the month. While noisy and likely a wash for GDP – being offset by inventories or investment – this is clear evidence of the global AI investment drive reaching Australia’s shores.
Offshore, markets have been pre-occupied by developments in the Middle East. At the beginning of the week, President Trump announced Project Freedom, an initiative to provide safe passage through the Strait of Hormuz to ships stuck in the Persian Gulf. As soon as the operation commenced though, skirmishes were seen between the US and Iranian military. UAE energy infrastructure was also targeted.
The US did not retaliate, however, instead referencing an end to the offensive portion of this war. And, within two days, Project Freedom was suspended indefinitely to make way for further intermediated negotiations. Reports suggest progress has been made, albeit without detail. Iran is arguably coming under greater pressure to make a deal, with China’s Foreign Minister emphasising this week the need for a quick end to the conflict and re-opening of the Strait while meeting Iran’s Foreign Minister. The timing of this development is not a surprise considering President Trump and President Xi are due to meet mid-month.
Data releases were uneventful this week. The ISM services index for April eased slightly to 53.6. The new orders index fell 7.1pts to 53.5, slightly below its 10-year pre-COVID average, and the employment indicator rose 4pts but remained weak versus history. The latest JOLTS job openings data and ADP private payrolls release were broadly consistent with balance between labour demand and supply. For the FOMC, this will keep the focus on inflation risks. Guidance given by FOMC members this week was consistent with this view.
A full update on our expectations for the global economy, Australia and New Zealand will be released later today on Westpac IQ in our May Westpac Market Outlook.
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