June CPI data came in well below expectations, with headline inflationfalling 0.1% MoM (original terms and SA terms), with the annual rateeasing to 3.8% from 4.0% in May and below the 4% Bloombergconsensus. Trimmed mean inflation rose 0.3% MoM, with the annual rateholding at 3.6%, unchanged from May and below the RBA's own MaySMP forecast of 3.8% and consensus forecast of 3.7%.The data lends support to Bullock's message yesterday that parts of theeconomy are cooling by more than the Bank had expected, and will likelybe read as reducing the near term case for further tightening. The Aussiedollar sold off sharply following the release, reflecting the marketrepricing lower the probability of near term hikes.Looking at the details, transport was the largest drag on headlineinflation, falling 2.7% MoM (-2.6% in SA terms). This was largelyattributable to a sharp fall in automotive fuel costs, which were down10.9% through the month. That said, there were still signs of strength,with housing rising 0.5% MoM, as utility costs rose 1%, with new dwellingcosts and rents continuing to rise, up 0.4% and 0.3% respectively. Foodand non-alcoholic beverages were also solid, rising 0.4% through themonth, with large rises in fruit prices (3.7%) and dairy products (1.3%). Onan annual basis, housing remained the largest contributor to inflation,with annual growth lifting to 6.8% (from 6.5%). This is followed by foodand non-alcoholic beverage inflation, which held steady at 3.3%.A slight concern for the RBA is that non-tradable (domestic) inflationticked up through the month, rising 0.4% MoM (SA terms) to 4.9% YoY(from 4.7%). The impulse of domestic inflation remains strong,annualising on a 3m basis at 5%. Tradable inflation fell sharply, down3.0% MoM, with the annual rate easing to 1.4% YoY (from 2.5% in May),largely reflecting the fall in automotive fuel prices.Overall, we maintain our view that the cash rate remains on hold at 4.35%through 2026 and into 2027. Today's print, coming a day after Bullock'sdovish remarks, adds weight to the view that the domestic slowdown isbroadening faster than the Bank had anticipated, and reduces the nearterm probability of further hikes even as underlying inflation remainsabove target. Markets appear to agree, with pricing for a further rate hikeby early next year falling sharply to around 60% probability, down frombeing almost fully priced in ahead of the release.Looking ahead, we expect headline inflation to ease to around 3.4% bySeptember, before easing further to 3.3% by year-end, though the pathis likely to be bumpy given base effects. Given this, we think the RBA willcontinue to focus on underlying measures of inflation rather thanheadline in setting policy. That said, given that underlying inflation hasundershot the RBA's own forecasts set out in May, we believe this willkeep the RBA comfortably on hold for some time. With trimmed meannow tracking below the Bank's own May SMP projections, we see scopefor the RBA to revise down its underlying inflation forecasts next month.This, in our view, would further cement the case for an extended hold.However, the recent escalation in the Middle East remains a risk.
