Markets were slightly mixed over the week. While equity markets were higher, bond markets and other interest rate sensitive sectors (i.e. infrastructure) sold off. The domestic equity market was able to shrug off the slightly higher than f’cst monthly CPI figures (act 4.0%, +0.2% to f’cst) with bond yields rising along all parts of the yield curve, with the most pronounced move at the long end of the curve. We are now starting to see some flattening of the domestic yield curve as the 2-10yr spread (+19bps) continues to narrow.
While the CPI print was above market f’csts, we continue to expect that the RBA will remain on hold when it next meets in August and will await the 2q24 CPI figure before making any assessment on rates. While the CPI number was lower than market estimates, it was only 0.2% higher, and given the volatile nature of the m/m figures, we do not see anything material that would warrant a policy shift from the RBA.
We believe that the domestic economy is slowing while the labour market also continues to cool, highlighted by the recent weak jobs vacancy numbers (-2.7% q/q). While the new financial year brings additional govt rebates and tax cuts for households, we do not see this being spent on discretionary demand given the continued high cost of living in key areas such as housing, food, utilities, transport and financial services. In addition, the low national savings ratio (0.9%) is well below long term averages and highlights the parlous state of savings across many households. Given the RBA has previously highlighted a 4q25 timeline for inflation to hit its target, we see no reason while it should be more aggressive, given the economic environment continues to slow as inflationary expectations moderate.
This week the release of the RBA minutes will provide a further gauge as to the views of the RBA, while both building approvals (f’cst +1.7%) and retail sales (f’cst +0.3%) for May will also be closely watched by the market. In the US, the focus on the ISM data along with jobless numbers and non-farm payrolls (f’cst +190k, -37k pcp) will be the main focus for markets. While the US labour market has remained resilient over the last few years, hiring has slowed and with that the broader economy. This will continue to play into a 3q24 US Fed rate cut 3q24 if maintained.
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