By Stephen Wu, senior economist at CBA.
- Headline inflation in April was unchanged at 2.4%/yr, with the annual trimmed mean measure nudging up to 2.8%.
- Retail trade data surprised on the downside, with warmer weather and price rises playing a role.
- The week ahead brings Q1 25 GDP, where we expect the annual rate to drift higher to 1.5%.
- Offshore, tariff news continued to make headlines. The RBNZ cut the overnight cash rate by 25bp to 3.25%.
- The week ahead will see ECB and BoC policy meetings. And US non-farm payrolls headlines the global data flow.
This week the focus was on the April CPI, with the figures showing headline inflation held steady at 2.4%/yr against expectations of a slight easing. Financial markets largely shrugged off the upside miss, with OIS markets continuing to price in a two in three chance of a back-to-back rate cut in July.
As always, there are caveats to the monthly reads: updates are only partial, and the first month of each quarter is overweight on goods and has less informational content than later months. However, the key surprise for us was the unexpected increase in new dwelling construction costs. This had been weak since August last year, helping to support the disinflation momentum seen in the overall CPI. More data will be needed to see if this is a reversal of the trend, or just a single rogue month. The May CPI print will be available prior to the RBA’s July 8 Board meeting and cash rate decision.
Retail trade data released on Friday surprised on the downside. Retail spending recorded a small fall, against expectations of an increase in April. Warmer weather contributed to some softness, as shoppers held back on their winter clothing shopping and likely as they wait until the start of end of financial year sales. Still, consumption growth looks to have remained modest over the start of the year, even as real incomes are rising.
Other data released began to lay the groundwork for next week’s Q1 25 GDP. Partial data on construction activity indicates that we should see dwelling investment provide a positive contribution to GDP, with a lift in residential construction welcome news. That said, building approvals data has softened noticeably the past two months, including Friday’s data. And they suggest that dwelling construction is not tracking close to the government’s housing target.
Thursday’s capex survey showed weakness, particularly in non-mining equipment capex which weighed heavily. We pencil in only a modest outcome for business investment growth for now.
Tuesday brings the rest of the partial GDP data. We expect to see net exports slightly detracting from GDP, on the back of a stronger increase in imports than exports. The lift in imports should also see further build-up of inventories, especially as household consumption growth has been fairly modest over the first three months of the year.
Overall, our current point estimate for next week’s GDP is a 0.4%/qtr print, taking the annual rate higher to 1.5% from 1.3%. We will finalise our estimate after the rest of the partial data is released.
Also this week, the RBA will have the opportunity to clarify their messaging with the release of the Minutes of the May Board meeting. Markets will focus on the weight of argument behind each of the on hold, 25bp cut, and 50bp cut options that were considered. RBA Chief Economist Sarah Hunter also delivers a speech Joining the Dots: Exploring Australia’s links with the world economy.
Offshore, the news flow was again dominated by tariffs. Trump’s tariffs were blocked by the US Court of International Trade. But the ruling was subsequently stayed in an appeal, so tariffs remain in force for now.
Closer to home, the RBNZ delivered a 25bp cut to take the OCR to 3.25%, as expected. But the path from here is less clear. Similar to the RBA, the RBNZ is grappling with what the fallout from the US trade war could look like, and their best guess is that the impact will be disinflationary.
Next week, other central banks take the limelight. Both the European Central Bank and the Bank of Canada will hand down monetary policy decisions. The US trade war is weighing on sentiment and outcomes and we expect central banks in both economies to respond. Our international economics team expect both to deliver 25bp cuts, to 2.0% for the ECB and 2.5% for the BoC.
On the data front, the focus will be on US non-farm payrolls. The May figures will be looked at closely for any signs that the sharp increase in uncertainty of the future business environment because of US tariff policy may start to impact growth in hiring. Still-low jobless claims do suggest that unemployment remains low. The US Beige book will also be scrutinised for any anecdotes about how businesses’ hiring and capex plans are evolving in response to US tariff policy.
