‍

Australia: prices up, labour cooling

The domestic focus last week was Wednesday's July CPI, and it was not the one the Reserve Bank wanted. Headline inflation eased to 3.5% over the year on base effects, despite a roughly 6% monthly rise in fuel prices, but the trimmed mean held at about 3.6%, and rose 0.5% in the month, well above expectation, with the pressure broad-based across goods and services rather than concentrated in one or two misbehaving components. The RBA's own forecast for August sees an acceleration to 0.83% and markets have moved to a coin toss for a hike in September and if not one is fully priced for November.

Tuesday's August minutes explain why the bar is so low. A unanimous hold at 4.35% in which the board discussed only holding or hiking, with several members judging the upside inflation risks would in fact be realised. The labour market is cooling, but not fast enough to help. Private-sector wage growth ran at 3.1% over the year to the June quarter, down from a 4.3% peak in September 2023, employment fell 16,000 in July and unemployment is 4.5% and drifting higher. The difficulty is productivity: at close to zero, even 3.1% wage growth leaves unit labour costs uncomfortably high, so a softening jobs market delivers very little relief. Household spending then rose 1.1% in July against expectations nearer 0.3%. Australian ten-year yields reached 5.12% on Friday, the highest since 2011, and the Australian dollar was the best-performing G10 currency over the week before easing to around 71.6 US cents.

The August reporting season is wrapping up with renewed momentum behind metals and mining and ongoing strength in the resurgent health care sector. Corporate earnings have broadly met expectations, assuaging fears that higher interest rates would have a more immediate impact on the domestic economy. However, analysts' forward estimates for industrial stocks were generally cut, while banks remain weak given the much softer outlook for housing, mortgage credit and possibly consumer speeding post the Federal Budget, especially if there is continued upward pressure on interest rates.

The hawkish chorus, and a dissenting voice

Australia is not the outlier. Kevin Warsh's Jackson Hole debut last Friday  was read as hawkish — PCE (Personal Consumption Expenditures) reaffirmed as the target, little comfort taken in underlying core inflation — and a September Fed hike moved to roughly 60% priced, with the US two-year yield up 11 basis points. Isabel Schnabel signalled the ECB needs to go further, and a Bank of Japan move is around 85% priced. Andrew Hunt is unconvinced. He expects Warsh to "talk loudly but carry a small stick", putting only 20% on an actual hike next month, 50% on the Fed simply declining to add liquidity and letting the market do the tightening for it, and 30% on cheap words and no tightening at all before the midterms.

His deeper point is that tightening may not reach the problem. Hunt describes a "Chips versus Fries" disequilibrium: the economy is producing at a chip-heavy point — AI, onshoring and defence capital expenditure — while consumers want fries, the consumer goods, services and housing where the shortages and sticky inflation actually sit. The chip side is not especially rate-sensitive and is financed increasingly through capital markets rather than bank credit, so higher rates land hardest on the parts of the economy that are already weak. He also cautions that the monthly data over-represents the fries side, so softness there is misread as broad weakness; he sees real growth near 2% with nominal GDP accelerating. On bonds he expects a modest near-term rally on Mr Bessent's twist before a march towards a destructive 5% on the US ten-year, and would rather express the sticky-inflation view through a weaker US dollar than through Treasuries, which remain propped up by intervention.

In summary, the uncomfortable message is that rates may not have peaked here.