The Australian dollar strengthened over the week, driven primarily by broad US dollar weakness. The Aussie's gains were pared earlier in the week as tensions in the Middle East showed signs of escalation. That said, the currency rallied strongly mid-week following the announcement that the US Treasury would expand its long dated bond buyback program over the coming quarter helped push the currency higher again. The Aussie did give back some of these gains late in the week, however, as July's labour force data came in weaker than expected.Locally, attention centred on July's labour force report, which surprised significantly to the downside. Employment fell 15.8k against expectations for an 11.7k gain, while the unemployment rate rose to 4.5% (from 4.4%). Underneath the headline, the weakness was concentrated entirely in part time roles, down 32.2k, while full time employment rose 16.3k, only a partial offset. That said, looking at the trend employment growth on a 3m/3m basis is holding near 0.5%, though this owes more to strength in May and June. With labour supply still growing faster than employment, upward pressure on the unemployment rate should persist, and we see scope for this month's data to bring forward the peak we expect at 4.6% by late 2026. One weak print won't move the RBA on its own, but it should lend the board some comfort that the labour market is loosening as intended, a dynamic that supports disinflation over time and cements our long held view that the hiking cycle has run its course.Elsewhere, Q2 WPI data was broadly in line with expectations, with wages rising 0.8% QoQ and easing to 3.2% YoY. The growth was supported by stronger public sector wages, which rose 0.9% QoQ and 3.4% YoY, while private sector wages grew more modestly, up 0.7% QoQ and 3.1% YoY.RBA deputy governor Andrew Hauser also spoke last week at a fireside chat in Queensland, reiterating the bank's hawkish bias that rates may need to rise again should inflation fail to ease, particularly given risks remain tilted to the upside. He added that the RBA expects slower growth, though not a recession, consistent with their recently updated forecasts.The week rounded out with flash PMI data for August, which showed manufacturing PMI stable at 52 points marking the fifth month in a row of expansion. That said, services PMI eased a touch, declining to 52.9 (from 53.6), though services output has remained in expansion for three consecutive months.Looking ahead, the focus turns to July CPI data due Wednesday. We expect headline inflation to rise 0.8% MoM (0.4% in seasonally adjusted terms), which would see the annual rate ease to 3.2% from 3.7%. Given ongoing volatility at the headline level, the RBA will keep its focus on underlying inflation, which is expected to remain elevated but show some signs of modest easing.
Globally, it was a comparatively quiet week on the data front, with price action instead driven by US fiscal and monetary policy communication. Indeed, mid-week, US Treasury announced plans to expand its long dated bond buyback program, lifting purchases in the upcoming September to November refunding quarter from US$2bn to US$4bn, after a sharp sell off had pushed the 30-year Treasury yield to a 19-year high above 5.3%. The move is aimed at supporting liquidity at the long end of the curve, which has faced persistent selling pressure amid elevated geopolitical tensions and broader market uncertainty. Risk currencies, including both antipodean currencies, along with equities rallied, while bond yields fell following the announcement.The relief proved short lived, however, with yields resuming their advance and largely unwinding the initial move, as the episode served as a reminder of the underlying fiscal pressures still facing the US. Treasury Secretary Bessent's remarks that further fiscal announcements are coming, with a greater emphasis on consolidation, offered some reassurance, though measures such as increased T-bill issuance are likely to ease funding pressures only at the margin, with genuine fiscal consolidation still seen as necessary over the longer term.The Fed also released minutes from its July meeting, which showed inflation concerns deepening among policymakers even as the committee held its policy rate steady in the 3.50 to 3.75% range. Three members dissented in favour of a hike at that meeting, and minutes showed a broader group of participants judging that further tightening would likely be needed should inflation fail to decline toward target, with price pressures seen as broad based. There was no mention of support for a rate cut, underscoring how far the Fed's policy debate has shifted from expectations at the start of the year that easing would be underway by now. Markets took little from the minutes itself, with attention instead centred on the Treasury's buyback announcement prior to the release, though markets continue to fully price a hike by the end of the year.Elsewhere, UK inflation for July was also released. Headline CPI rose to 2.9% YoY in July (from 2.6% prior), though this was largely driven by a 13% increase in Ofgem's energy price cap that pushed housing and household services inflation up. More importantly for the BoE, core inflation held steady at 2.6%, which was more encouraging.In the Middle East, oil prices continued to climb higher, with Brent climbing to its highest level in almost a month as the US moved to ratchet up economic pressure on Iran. President Trump announced fresh measures threatening consequences for countries doing business with Iran, though details remain unclear and are unlikely to extend to Iran's oil sales given the risk of confrontation with China ahead of Trump's planned meeting with President Xi next month. Hopes for a near term reopening of the Strait of Hormuz have faded, with Iran's continued control, alongside the US blockade of Iranian ports, likely to keep flows constrained for some time. Iran's central bank governor said this week that oil exports have virtually ground to a halt.
