SYDNEY — Australia's second-quarter Consumer Price Index registered 3.4 percent year-over-year, down from 3.6 percent in Q1, according to official data. Reserve Bank of Australia Assistant Governor Brad Jones said the reading came in "a touch softer than anticipated" at a recent economic forum in Sydney.
The soft headline number, however, masks a labor market that is still running hot. The national unemployment rate sits at 3.8 percent, and average wage growth accelerated to 4.1 percent in Q2 from 3.9 percent the prior quarter — a combination that keeps services inflation sticky and complicates any pivot toward easing.
Underlying inflation, excluding volatile items, showed a similar moderation but remained above the RBA's 2 to 3 percent target band. Services categories — particularly housing and recreation — continued to rise, offsetting declines in goods prices.
The Australian government bond market priced the mixed signals quickly. The two-year yield dropped five basis points to 4.08 percent following Jones' comments, while the 10-year held at 4.25 percent, steepening the 2s/10s spread by five basis points. With the cash rate target at 4.35 percent, the front end is now trading through the policy rate — a configuration that reflects market skepticism about near-term hikes rather than any conviction on cuts.
Institutional managers are trimming duration exposure accordingly. An extended hold at elevated rates raises the mark-to-market risk on longer-dated Australian government bonds, and the short end offers better carry with less price volatility until the RBA signals a clearer path.
Futures markets currently price a 65 percent chance of a pause at the Aug. 6 meeting. The accompanying policy statement will be parsed for any shift in the RBA's data-dependent guidance, with services wage growth the variable traders are watching most closely.
The Australian dollar slipped 0.2 percent against the U.S. dollar to 0.6720, pressured in part by yield differentials with the United States, where the federal funds rate stands at 5.50 percent.
Until wage growth in services moderates more meaningfully, the RBA has little room to declare victory on inflation — and bond markets are positioned for that constraint to last.
