AUSTRALIA: Core Inflation Measures Converging As Moderate Towards Mid-Point
The Q2 trimmed mean measure of inflation moderated further towards the RBA’s target mid-point of 2.5%. It printed at 2.7% with the 2q/2q average annualised at 2.6%. Our PCA measure of underlying inflation came in at 2.6% for the second straight quarter, very close to the band mid-point. The downtrend in core inflation as well as market services inflation now within the 2-3% band should reassure the RBA that inflation is sustainably within target and result in a 25bp cut on August 12.
- There are different ways of measuring underlying inflation – trimmed mean, excluding volatile items such as food and energy, the median. We have another version using principal components analysis (PCA) based on Bank of Canada research. They are all now within the RBA’s 2-3% band.
- PCA is useful for when there are a large number of variables, as it finds common patterns that explain most of the variance in the data. In this case, it extracts the common movement in prices and thus creates a measure that reflects underlying developments in inflation and not sector-specific shocks.
- The chart below shows PCA CPI against other inflation measures. It is less volatile, with a standard deviation below that of the trimmed mean. After running ahead of the trimmed mean from 2019 until mid-2021, the two have converged around 2.6-2.7% along with other underlying measures of inflation. The gap was as wide as 1.5pp in Q4 2022.
Australia underlying inflation y/y %
Source: MNI - Market News/ABS/LSEG
- The share of CPI components rising more than 3% in Q2 was slightly higher than in Q1 at 36.8% after 35.6%. However, this is below the historical average and low compared to 2022-2024. Little change to the share and unchanged PCA core inflation may be signalling a stabilisation.
- The median CPI moderated 0.1pp to 2.1% y/y in Q2, it has been within the RBA’s band for the last 5 quarters.
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US: Trump Urges Republicans To Pass Tax Bill
US President Trump has posted Truth Social, urging Republicans to pass the tax bill. He notes failure to pass it will result in a 68% tax increase. See below for the full post.
"Republicans, the One Big Beautiful Bill, perhaps the greatest and most important of its kind in history, gives the largest Tax Cuts and Border Security ever, Jobs by the Millions, Military/Vets increases, and so much more. The failure to pass means a whopping 68% Tax increase, the largest in history!!!"
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JGBS AUCTION: Mixed To Strong Demand Metrics For 10Y Auction
The 10-year JGB auction delivered mixed to solid results, with the low price beating expectations at 100.40, according to the Bloomberg dealer poll. However, the cover ratio decreased slightly to 3.5070x from 3.6627x, and the tail lengthened to 0.03 from 0.01, albeit the shortest since March 2023.
- This performance came with an outright yield 5-10bps lower than last month and approximately 15bps below the recent cyclical high of 1.596% reached in late March.
- Moreover, the 2s/10s and 7s/10s yield curves had flattened slightly from last month.
- An improvement in investor sentiment toward longer-dated global bonds through June, after a sharp deterioration in May, may have supported the bid tone.
- Notably, today’s result comes after Governor Kazuo Ueda reaffirmed on June 20 that the BoJ would consider raising its benchmark interest rate if its economic outlook materialises.
- In early afternoon Tokyo trading, the cash 10-year JGB is 3bps richer from pre-auction levels, while JGB futures have gapped higher.
