The Reserve Bank of Australia (RBA) announced on August 6 that the cash rate target would remain unchanged at 4.35%, marking six consecutive months without adjustment. RBA Governor Michele Bullock stated that although inflation has eased from its 2022 peak, it remains above the 2-3% target range. The latest data shows that the quarterly core CPI for June stood at 3.9%, aligning with the RBA’s forecasts but marking the 11th consecutive quarter where inflation has exceeded the midpoint of the target range (2.5%).

Regarding the domestic economy, the RBA highlighted significant uncertainties. While the labor market has shown signs of slowing, both the labor force participation rate and unit labor costs remain elevated, posing a risk of a slow decline in inflation. The RBA currently forecasts that inflation will return to the target range by the second half of 2025, with the midpoint likely being reached in 2026.

Additionally, slow GDP growth, rising unemployment, and increasing pressures on businesses all point to a weakening of economic activities. This could result in household spending growing slower than expected, further contributing to prolonged low output and potential deterioration in the labor market.

As for the global economic outlook, while the softening of China’s economic prospects has already impacted commodity prices, geopolitical risks and the continued depreciation of the Australian dollar could negatively affect supply chains, thereby increasing inflationary pressures.

Given these uncertainties, the RBA emphasized that its primary objective remains to stabilize inflation within the target range. The central bank will continue to adjust its interest rate policies as necessary, based on economic data and risk assessments, to ensure the achievement of stable inflation and a robust labor market.

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(Photo Credit: Reserve Bank of Australia)

The Institute for Supply Management (ISM) released its July Services PMI report on August 6th, revealing that the Services PMI rose from 48.8 in the previous month to 51.6, surpassing market expectations of 51.0.

The expansion was driven by 10 industries, including leisure and hospitality, accommodation and food services, financial services, and healthcare.

Respondents indicated that sales figures and customer numbers were flat compared to the same period last year, with rising prices dampening consumer demand. On the other hand, eight sectors, including agriculture, real estate, retail, and information technology, experienced contraction. Respondents attributed this to the U.S. election, price pressures, and high interest rates impacting long-term purchasing decisions.

In the component indices, the Business Activity Index increased from 49.6 in the previous month to 54.5, with respondents generally seeing business activity as strong, though signs of future challenges remain.

The New Orders Index rose from 47.3 to 52.4, indicating improved demand. The Employment Index, closely watched by the market, rose from 46.1 to 51.1, marking its first expansion after five consecutive months of contraction. Respondents noted that companies are actively filling vacancies and training the workforce required for the future.

Overall, the performance of the services sector in July contrasts sharply with the stagnation in the manufacturing sector. On the other hand, similar to manufacturing, consumer spending remains constrained by price pressures, while the labor market continues to slow but has yet to show significant deterioration. According to data from Fed Watch, the market broadly expects the Federal Reserve to cut interest rates by 0.25% to 0.5% in September, with a total of three to four rate cuts anticipated throughout the year.

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The U.S. Bureau of Labor Statistics released the July employment report on August 2, indicating that the unemployment rate increased to 4.3% from 4.1% in June. Although the unemployment rate remains near historical lows and close to the natural rate of unemployment, it has been rising for four consecutive months.

At the same time, nonfarm payrolls increased by only 114,000, significantly below the 12-month average of 215,000. The year-over-year growth in average hourly earnings also declined from 3.8% to 3.6%, continuing its downward trend. Additionally, the number of initial jobless claims continues to rise.

During the July FOMC meeting, the Federal Reserve noted that it would more carefully balance the risks between the labor market and inflation. Fed Chair Jerome Powell also explicitly stated that he did not want to see further cooling in the labor market.

In light of the series of data showing a slowdown in the labor market, the market has started to anticipate more aggressive rate cuts at the September FOMC meeting. According to FedWatch data, the probability of a 50-basis-point rate cut has surged from 11.5% a week ago to 77.5%.

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(Photo Credit: Pixabay)

The Institute for Supply Management (ISM) released the Manufacturing Purchasing Managers’ Index (PMI) for July on August 1st. The report indicated that the Manufacturing PMI was 46.8 in July, down from 49.3 in June and below the market expectation of 48.8. This marks the fourth consecutive month of decline, reaching the lowest level in eight months.

This decline reflects weakening demand and slowing production. The New Orders Index dropped from 49.3 to 47.4, indicating a continuous decrease in order volumes and a further move into contraction territory. The Production Index also fell from 48.5 to 45.9, showing that manufacturing output is slowing down. Additionally, the Employment Index saw a sharp decline from 49.3 to 43.4, signaling a deterioration in manufacturing employment, with companies resorting to more layoffs in response to weak demand.

Overall, the high-interest-rate environment has increased financing costs for businesses, reducing their investment appetite, while also suppressing consumer spending. However, with the Federal Reserve potentially initiating rate cuts in September, some relief for businesses and consumers may be on the horizon.

Nevertheless, even with rate cuts, interest rates are expected to remain elevated, meaning that businesses will still face considerable challenges. Manufacturing is likely to remain subdued in the short term, and economic growth momentum will continue to slow down.

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(Photo Credit: Pixabay)

The Federal Reserve held its July FOMC meeting on July 31, deciding to keep the federal funds rate target range unchanged at 5.25% to 5.5%. In its post-meeting statement, the Fed noted signs of a cooling labor market and a slight uptick in unemployment, coupled with reduced inflationary concerns. The Fed’s focus has now expanded from primarily addressing inflation risks to a more balanced consideration of both inflation and employment risks.

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During the post-meeting press conference, the Fed emphasized that if inflation continues to decline as expected, with economic growth remaining solid and the labor market holding steady, a rate cut could be discussed at the September FOMC meeting. Additionally, the Fed may adopt a gradual approach to lowering rates in the future. The Fed also noted that the labor market is gradually normalizing, and it aims to maintain the current employment situation without further deterioration. Therefore, key employment metrics, such as the unemployment rate and initial jobless claims, will be closely monitored.

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Market expectations are now firmly anchored on a potential rate cut in September, with FedWatch data indicating an 87.5% probability of a quarter-point cut. The Fed is expected to continue a “wait-and-see” approach, gradually adjusting its policy based on ongoing economic conditions.

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(Photo Credit: Federal Reserve)