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More data showing our economy is slowing, but less progress on inflation than the RBA had expected; our latest thoughts and forecasts, ahead of the Federal Budget.

The RBA kept rates on hold again in May as expected, but (leading up to the policy meeting) markets have been rethinking their timeline for when the easing cycle might start, and had even started to (partially) price in another hike.

More strong jobs data (with our unemployment rate still in the high 3s) and stubborn core inflation encouraged a few market economists to predict fresh RBA hikes, but much weaker retail sales numbers were a reminder that households are doing it tough and are cutting back on discretionary spending.

Our view for over a year has been that RBA rate cuts will start in 2025 to help support the slowing economy, but not in 2024 because of how difficult it is to eradicate inflation, and the market seems to be coming to the same conclusion, with the first cut now implied in early to mid 2025; so while the possibility of another hike is always there, and similarly the US are taking longer to start their easing cycle, we still favour no move up or down from the RBA this year.

The turning point between tightening and easing cycles is always the toughest in which to forecast, for economists and for central banks, as the timing of the first cut is at the mercy of the data, and economic data in this period is generally all over the shop, but we’re still expecting very slow economic growth and domestic demand ahead, with the main bright spots from international tourists and students, plus strong public investment.

Headline CPI fell to 3.6% in the latest numbers for the first quarter,
but the core read was 0.2% higher than hoped at 4%, with rents and services inflation remaining the problem. Goods inflation continues to moderate, although even it may be challenged by higher energy prices and geopolitical strains, and the latest RBA Statement on Monetary Policy now forecasts core inflation to still be well above target at year-end. Still, base effects should start to help by early next year.

European rate cuts are already underway with the Swedish central bank cutting rates overnight, and the European Central Bank expected to do the same next month, ahead of the Bank of England. The US Federal Reserve are now favoured to start cutting rates around September.

Here, we remain around 6 months behind most of these cuts, and this ‘higher for longer’ narrative has helped push the Aussie Dollar higher, especially against the Japanese Yen,
now above 100 for the first time in a decade. The Aussie has also been gaining on most cross rates, but against the US dollar it will be a tougher climb, likely to be influenced by interest rate differentials, commodity prices and the November presidential election.

And lastly, the federal budget next week is likely to reveal a modest surplus helped by firm commodities and strong labour markets, offset to a degree by the stage 3 tax cuts and other Cost of Living support, but all with a fairly minimal impact on inflation.

And that’s the market update from Bendigo Bank.