Key takeaways from the week’s developments.
In Australia, the RBA Monetary Policy Board raised the cash rate by 25 basis points to 4.60%, an outcome widely anticipated after Governor Bullock signaled that upside inflation risks had materialized—consistent with the MPB’s August conditionality for further hikes.
Bullock highlighted three specific upside risks. The Middle East conflict was flagged as the risk that has “materialized,” driven by the recent re-escalation and surge in crude oil and refined product prices. The RBA’s liaison cautioned that this could trigger further cost pass-through and persistent inflationary pressures. Additionally, domestic capacity constraints and the data center/AI investment boom were noted as ongoing risks requiring vigilance.
In a mid-week video update, Chief Economist Luci Ellis explained why the threshold for a November rate hike remains low. A 25 basis point increase in November is now expected, barring a sudden resolution to the Middle East conflict or another event that significantly dampens energy cost forecasts.
The August CPI subsequently showed underlying (trimmed mean) inflation rising 0.2% monthly (3.4% annually), slightly below market consensus but in line with Westpac’s forecast. While monthly details were mixed, housing-related components—particularly rents and new dwelling purchases—remained the primary drivers of underlying inflation. Headline inflation fluctuated, with the unwinding of the fuel excise cut sparking another fuel price spike. We maintain our forecast for a 0.9% trimmed mean lift in Q3; with rising Q4 upside risks, a November follow-up hike appears most probable.
Concerning growth, household spending surprised with a flat August reading. Services spending retreated after recent strength fueled by major sporting events, offset by a rise in goods spending, particularly fuel and electric vehicles. Combined with early September card data, the consumer spending pulse is softening slightly. Nonetheless, robust business investment could reemerge in Q3. August goods trade data showed a significant $4.3 billion spike in data center-related equipment imports, comparable to Q1 levels. Although import-driven, our modeling indicates the local economic impact is roughly half the total investment.
On housing, Cotality reported national dwelling prices fell another 1.1% in September. While Sydney and Melbourne led the correction, declines across other capitals signal the downturn is deepening and broadening, as higher rates collide with May’s budget tax changes. Investor credit growth continues to contract, reflecting sentiment effects. Westpac forecasts a peak-to-trough decline of roughly 7%, constrained by tight on-market supply. For further details, see our latest Housing Pulse.
Offshore data offered ample analysis.
In the US, August inflation moderated despite resilient household demand and higher energy prices. Headline PCE rose 0.3% monthly and 3.4% annually, while core PCE increased 0.2% monthly and 3.0% annually. Encouragingly for the FOMC, the share of PCE components rising over 3% annually fell to 45% from 49%, suggesting easing broad-based pressures. Household spending remained robust, up 0.9% monthly (around 0.6% in real terms), though soft personal income growth of 0.2% indicated households drew down savings.
The ISM manufacturing survey outperformed its headline. The index dipped 0.1 points to 54.5, marking nine consecutive months of expansion. Capacity constraints emerged, as production softened but backlogs surged 4.6 points to 56.4, indicating firms struggled to meet demand. New orders rose 1.6 points to 55.3, driven by domestic demand as export orders weakened and backlogs grew. Employment increased 1.5 points to 52.7. Manufacturers faced renewed cost pressures, with the prices paid index jumping 6.8 points to 77.9, citing higher steel, aluminum, energy, freight, and semiconductor shortages across all major industries.
The week’s data did little to bridge the FOMC divide, evident in the week’s busy Fedspeak. Some participants advocated further hikes, citing persistent inflation, diminished supply capacity, and insufficiently restrictive policy. Others urged patience, pointing to inflation progress and the need to assess upcoming data following September’s hike. Both sides agree inflation will dictate the timing and pace of future moves. Our view holds that one more hike is likely this cycle to push policy toward neutral.
In China, policymakers announced targeted support measures to stabilize growth and aid the property sector. The PBOC cut Pledged Supplementary Lending rates by 25 basis points to 1.5% and expanded targeted lending quotas. Subsidies for eligible first-home buyers were introduced, capping mortgage cost support at 1 percentage point (up to CNY10,000) for homes under 120m² valued below CNY1.5 million over five years. These complement August reforms improving developer financing and housing completion. However, weak credit demand and confidence limit policy transmission.
September PMI data suggested modest activity improvement, though details were less convincing. Manufacturing returned to expansion at 50.1, supported by stronger production and new orders, though much of the gain reflected a price rebound, with raw materials up 7.6 points and producer prices up 6.2 points. The employment index fell 0.6 points, remaining below 50 for nearly four years. Non-manufacturing improved, with services PMI rising from 49.0 to 50.2 on stronger construction. Input and output prices rose, selling prices crossed back above 50, and export orders improved to 48.5, though employment at 45.9 remains in contraction. Overall, activity is stabilizing and policy support is gaining traction, but weak labor demand, subdued credit growth, and soft domestic demand indicate a fragile recovery.
In Japan, the September Tankan survey delivered constructive signals supporting further policy normalization. Business conditions improved 2 points for large manufacturers and 5 points broadly, while profitability and capital expenditure intentions strengthened. Large manufacturers expect 11.6% fixed investment growth in FY2026, and large non-manufacturers expect 11.2%, signaling medium-term confidence.
Capacity indicators improved across sectors, with excess capacity less negative, suggesting demand keeps pressure on existing resources. Labor shortages intensified, with employment conditions worsening across most industries and firm sizes, pointing to a tighter labor market. Inflation expectations remained anchored near 2%, reinforcing Japan’s move toward sustainable inflation. The survey supports an economy near capacity and makes a December rate hike a realistic possibility.
