Australian services PMI hits 50.5, but new orders shrink for fourth month

The headline return to expansion is unlikely to shift RBA rate expectations much. It was driven by staffing, not demand. New orders have now contracted for a fourth straight month. Backlogs are being run down, not rebuilt.

The sharpest signal for markets is the confidence collapse. Year-ahead business sentiment hit a two-and-a-half-year low in June, S&P Global said. That points to businesses pulling back on hiring and investment over coming months unless order books turn around.

Softer input and output price inflation across all five sectors will be read as modestly disinflationary at the margin. The fragility underlying June's bounce suggests the data carries limited durability into the second half of the year.

The seasonally adjusted S&P Global Australia Services PMI Business Activity Index rose to 50.5 from 48.7 in May. That ended the prior month's contraction and marked the second output increase in three months. Andrew Harker, economics director at S&P Global Market Intelligence, said the renewed rise looked positive on the surface but the details warranted caution. The improvement was driven more by higher staffing than by any response to new business.

Employment rose for the seventeenth time in 18 months. Some firms hired in anticipation of new projects. Companies used the extra capacity to work through a backlog that shrank by the largest margin in almost two years.

New orders fell for a fourth consecutive month. Businesses reported a lack of confidence among customers. New export orders declined for a second straight month, a trend attributed to the war in the Middle East weighing on demand from abroad.

Cost pressures showed some easing. Input costs continued to rise sharply, though the pace of inflation softened for a second consecutive month. Fuel prices and wages were the most commonly cited drivers. Competitive pressures limited how much firms could pass through. Output price inflation slowed to its weakest pace since January, easing across all five broad sectors.

Business confidence in the year-ahead outlook fell for a second straight month to its lowest since November 2023. Worries about the broader economic environment and tax changes announced in the Federal Budget were the key drags. The finance and insurance sector recorded by far the weakest optimism among the five monitored sectors. Sentiment held up best in information and communication.

The Composite Output Index, which weights services against manufacturing, rose to 50.4 from 48.7. Manufacturing output is still contracting, albeit at a softer pace than in May.

The AUDUSD pair will focus on Wednesday's monthly CPI print for a more current read on disinflation. The PMI data is backward-looking and carries the caveat that it measures sentiment, not hard economic activity.