Policy Paths Diverge: RBA Hawks, Fed Doves, ECB on Hold

This week's data flow gave central bankers a mixed picture. The RBA minutes showed a board prepared to raise rates again if inflation stays sticky. Over the Atlantic, the ECB got some relief. Euro-area inflation slipped below 3%. In the US, a weak payroll print and falling ISM prices reinforced the case for the Fed to start cutting by September.

The RBA's June minutes, released Tuesday, revealed the board considered raising the cash rate. Members saw the economy running with excess demand and widespread price pressures. The conflict in the Middle East added upside risk to inflation and downside risk to growth. A rate hike was on the table if needed. Deputy Governor Sarah Hauser, speaking later, argued that inflation is more sensitive when the economy is tight, and that the policy trade-off allows the central bank to focus on inflation without heavy damage to jobs. That logic supported the earlier rate increases and the June pause.

AlphaScala's risk model gives RBA Global (RBA) a score of 37 out of 100, a mixed reading that matches the mixed signals from the central bank data flow.

Across the Pacific, the June jobs report disappointed. Nonfarm payrolls rose 57,000, and prior months were revised down by a combined 74,000. The three-month average fell to 111,000 from 164,000. The household survey told a weaker story: employment dropped 507,000, participation slipped to 61.5%. Had participation stayed at January levels, the unemployment rate would top 5%, not the reported 4.2%. The numbers suggest the labour market is treading water, economists said.

The ISM manufacturing report offered a bright spot for the Fed. The prices paid index dropped 9.1 points to 73, signalling a turn in upstream pressures. Combined with lower oil prices and benign CPI details, the data should ease the FOMC's concern about a re-acceleration of inflation, analysts noted. Euro-area inflation confirmed the trend. The June preliminary print showed a 0.1% fall against expectations of a 0.1% gain. Annual headline inflation slowed to 2.8% from 3.2%; core eased to 2.4% from 2.6%. And that came with a tight labour market.

The Bank of Japan's quarterly Tankan survey added a cautious note. Large manufacturer sentiment rose to 22 from 17. Smaller manufacturers and service firms were less optimistic. R&D expectations were revised down, and profitability and labour market indicators softened. The survey implies the BoJ will need to adapt, analysts said.

The policy contrast is sharp. The RBA is considering a hike. The Fed is moving toward a cut. The ECB is on hold. The BoJ is cautiously normalising. Those differences will drive FX flows in the weeks ahead, traders said.

The next scheduled data are US CPI on Wednesday, followed by the RBA's August policy decision. The BoJ meets in late July.