Markets spent the week leaning into the better news from the Gulf. The Iran–Israel ceasefire is not straightforward and still last week there were missile exchanges and a Singaporean tanker was fired on as it crossed the Strait of Hormuz  but there has been a steadily rising number of vessels making the transit. By Thursday, around 7.2 million barrels of crude were getting through in a day, well short of the roughly 20 million that flowed before the conflict, but enough to send Brent crude from above US$78 at the start of the week down to the low US$70s by Friday. For Australian households, that lower oil price is already showing up at the petrol bowser and is the single biggest reason the inflation picture improved this week.

Australian inflation — better at the top, sticky underneath

The May monthly CPI indicator slowed to 4.0% year on year, below market expectations. Lower fuel prices and softer travel costs drove the improvement. Underneath the headline, however, the trimmed mean measure ticked up to 3.6% year on year, with clear pass-through of higher input costs into restaurant meals, takeaway food and new dwelling prices. The RBA is likely to remain more focused on whether those first round price increases morph into second round effects later in the year. Markets are still pricing roughly a 30% chance of an August hike. For what it's worth, Andrew Hunt of Hunt Economics this week argues that Australia's non-traded inflation pattern puts the RBA back in hiking territory near term.

This relates to a striking observation from Hunt about China this week. Hunt asks whether the PRC has "done-a-180",  becoming "deflationary in commodity markets but inflationary in output markets." Cash-strapped Chinese firms, much as in 1990s episodes of stress, are being obliged to raise export prices: the "credit subsidy" on China's selling prices has effectively been removed, even as domestic weakness cools the country's appetite for raw materials. The implication of Australia is weaker iron-ore and coal demands while firmer Chinese export prices feed our imported goods inflation. Hunt's bottom line: "the RBA still needs to raise rates in the near term, although events in China may yet change the situation".

Labour market and the consumer

Australian unemployment ticked back to 4.4% in May after a one-off pop to 4.5% in April that the Bureau of Statistics largely attributed to survey timing. Household spending rebounded to A$80.6 billion in May, up 5.5% from a year ago, with discretionary spending — cafes, restaurants, recreation, clothing — leading the way. The picture is of an economy that is softening only gradually, which is consistent with the RBA staying on hold rather than easing.

Global cross‑currents

US core PCE inflation rose to 3.4% in May, the highest since 2023, and PMIs point to a US economy still pulling ahead of Europe and the UK. Treasury Secretary Bessant publicly likened the current cycle to Alan Greenspan's "one tap on the brakes" in 1997, framing tariffs and reshoring as a supply‑side positive. A bruising mid‑week sell‑off in AI and semiconductor names (the KOSPI fell roughly 10% on Tuesday) reminded investors how concentrated leadership has become. Trump's weekend threat of 100% tariffs on countries pursuing digital services taxes is a reminder that policy risk has not gone away. The AUD whipped between 70 and 65.9 US cents before settling near 69 cents on Friday, a useful reminder that unhedged global exposures are again doing heavy lifting in portfolios. 

For Australian investors, concentration risk in US large-cap tech is real, but perhaps the trickier issue for individuals and the economy is going to be the cross-wind from China. Weaker commodity demand and stickier imported goods prices press on both halves of a typical balanced portfolio. We think maintaining diversification amidst concentrated markets and polarised economies is becoming increasingly valuable.