The Australian dollar performed relatively well this week, driven largelyby weaker than expected US inflation data which saw it rally in the earlypart of the week. The currency has continued to flirt just below the 70US cents mark, with the Aussie seemingly looking through the escalationin the US-Iran conflict.
Domestically, consumer and business surveys both pointed to a modestimprovement in sentiment, though this was largely covered in our midweek update. Westpac-MI consumer confidence rose 4.1% in July to 83.9from 80.6 in June, with easing fuel prices and moderating rate rise fearshelping lift the mood, though consumers remain downbeat on theeconomy and on major purchase decisions, which could weigh onhousehold spending. Unemployment expectations improved sharply,falling back toward their long run average and suggesting job lossconcerns are subsiding.
The NAB Business Survey for June showed a similar pickup, withbusiness confidence rebounding sharply to -5pts from -14, though still innegative territory, while business conditions held steady at 3pts. Onprices, both purchase costs and final product prices continued to cool,with purchase cost growth easing to 2% QoQ from 2.5% on falling fuelprices through June, supported by the US-Iran peace deal, while finalproduct price growth eased to just 0.6% from 0.9%. Labour cost growthwas stronger, however, rising 2% QoQ from 1.5%, likely reflecting the4.75% minimum wage rise which was announced within the surveyperiod. On balance, the data confirms that inflationary pressures havelargely normalised, supporting our view that the RBA is done with itshiking cycle.
Consumer inflation expectations data for July was also released later inthe week, which eased to 4.7% from 5.5%, the lowest since January. Thedecline largely reflected moderating headline inflation in recent months,despite remaining above the RBA's 2-3% target. This tick down ininflation expectations supports our long held view that the RBA willremain on hold for the remainder of this year and into 2027.
Looking ahead, the key focus will be on Australian labour force data dueThursday. We expect a modest 16.5k rise in employment through themonth, with the unemployment rate holding at 4.4%. We continue to holdthe view that the Australian labour market is cooling and is expected tosoften further this year, with the unemployment rate hitting 4.6% by end2026.
The US-Iran conflict remained the key global theme this week, with theUS military carrying out more strikes on Iran. Indeed, Iran has retaliatedwith attacks on US bases in Jordan, Kuwait and Bahrain, and warned thatUS infrastructure in the region would face heavy retaliation shouldWashington target its civilian sites. That said, US Central Commandreported a double digit number of vessels crossed the Strait of Hormuzon Tuesday night with US support, though many ships continue to transitwith tracking systems switched off, making traffic volumes difficult toverify. Brent crude closed out the week around $88/bbl with prices uparound 19% for July to date.The IMF also released a notable paper on the conflict this week, findingthat closure of the Strait of Hormuz has cut off around a fifth of global oilconsumption, with over 1.1 billion barrels lost by May. Oil prices, however,rose far less than feared, as demand compression, non-Gulf productiongains led by the US, Venezuela, Guyana and Russia, and inventorydrawdowns helped absorb the shock.
The IMF did note the recovery ofinventories could take two to three months even once the Strait fullyreopens, and warned these buffers are now depleted, leaving marketsmore exposed to renewed escalation. Hence the recent escalation in theMiddle East, if it persists for longer than markets anticipate, could pushoil prices higher than seen earlier this year.
On the data front, US headline CPI fell 0.4% MoM in June, well below the-0.1% consensus, with the annual rate easing to 3.5%. core CPI was flaton the month against expectations for a 0.2% rise, slowing the annualrate to 2.6%. PPI told a similar story, with the headline measure falling0.3% MoM on lower gasoline prices, taking the annual rate down to 5.5%from 5.7%, while core PPI rose a below consensus 0.2% MoM. Goods PPIfell 1.4% MoM, with nearly two thirds of the decline reflecting lowergasoline prices, while services PPI rose 0.2% MoM, half of which camefrom expanding gasoline retailing margins.
Overall, the disinflationary trend shown in both CPI and PPI for Junecould be overlooked given the surge in oil prices seen through July. Thatsaid, markets still pared back Fed hike pricing, with a September movenow around 60%, down from being fully priced earlier in the week, yetmarkets are still fully pricing in a hike by year-end. Our long held call forno further hikes this year is reinforced by the prints, though the outlooknow hinges heavily on the trajectory of the Iran conflict.
On the US consumer, June retail sales rose 0.2% MoM (from 1%), in linewith consensus, with the slowdown driven by falling gasoline prices,though sales ex-gasoline rose 0.7% m/m following a 0.9% gain in May.Indeed, spending growth was quite solid across the board, with seven ofthirteen groups rising through the month. The resilience in spendingacross the US likely reflects higher tax rebates coinciding with astabilising labour market. Additionally, University of Michigan consumersentiment for July jumped sharply, with the index rising to 54.4 (from50.8), largely supported by easing oil prices.That said, most survey mostresponses were collected before the resumption of US strikes on Iran.
