Economic Update - July 2026

Warsh wants the market to lead and the yield of US 30-year government bonds is sending him a message. Similarly, the yen may be sending a message to the Japanese PM. Meanwhile, Australia was steady as it goes, with inflation moving down, household spending resilient, and no Board meeting this month. Of course, uncertainty remains over the war in the Middle East, with a new round of fighting leading to a new round of talks behind the scenes.  

What happened in Australia?

With no RBA Board meeting in July, the focus was on key data. So, what did the key data show? Not much has changed despite the 0.75% in rate rises this year.

Headline inflation fell slightly from 4% in May to 3.8% in June, which was better than expected, and the RBA’s preferred measure, the trimmed mean, remained at 3.6% (see chart below).

The RBA will be happy that inflation has stopped rising, but it will want to see more data before it is confident that inflation is coming down. The recurrence of hostilities in the Middle East doesn’t help.

Despite the interest rate increases, household spending remains strong (see chart below). Besides the understandable increase in spending on transport, spending on recreation and culture increased by 1.4% during the month, primarily driven by air and sea travel. This suggests that many households aren’t yet feeling the pinch of tighter interest rates. The RBA would like to see household spending moderate to bring down domestic pressure on inflation.‌

Unemployment remained unchanged at 4.4% in June.

What happened around the world?

USA

US GDP slowed in the June quarter while nonfarm payrolls fell in June, but the US consumer continues to spend with a 3.2% increase over the year (see chart below).

Inflation fell 0.4% compared to June, which left the market expecting a hold from the FOMC. The fall in inflation was mirrored by a fall in June PCE, released at the end of the month. However, with three of the 12 members voting for an increase and Warsh once again offering no forward guidance, the US 30-year bond yields rose further (see chart below). This suggests that the market has doubts about the trajectory of the Fed under Warsh.

Further, despite Warsh’s claims that financial conditions have tightened, the national financial conditions index shows an easing since the start of the war (see chart below).

China

June exports increased by 9.45% compared to May and 27% compared to the previous year, recording the strongest result in five years. Semiconductors and computer equipment led the way. Like the US, China is benefitting from the AI boom.

However, the rest of the economy continues to struggle. GDP slowed to 4.3% in the June quarter, down from 5% in the March quarter and below the 5% annual target. July PMI also fell back into contraction after recent gains (see chart below) - economists blamed the sluggish domestic economy.

EU

After raising interest rates last month, the ECB kept rates on hold in July.

Inflation increased slightly to 2.9% in July, with energy inflation increasing because of the Iran war (see chart below).

Euro area GDP grew 1% in the June quarter compared to the previous year, up from 0.5% in the March quarter (see chart below).

Japan

The yen continued to slide against the USD during the month to reach a 40-year low (see chart below). As I’m writing, Japan’s MoF and US Treasury have intervened to support the Yen, as expected.

Most commentators believe the slide is being driven by the expectation that US interest rates are likely to increase in the medium term, increasing the interest rate differential with Japan. It’s all about the carry trade! However, some commentators, including Torsten Slok from Apollo Global Management,  believe that the recent fall in the Yen is more about Japan’s fiscal position and PM Takaichi’s big spending plans.

In other news, the BoJ kept rates on hold after raising last month, and core CPI edged up to 1.6%.

UK

The BoE kept rates unchanged in July. Inflation decreased from 2.8% in May to 2.6% in June. The BoE noted the impact of the Iran war on energy prices but doesn’t yet believe that it has fed into prices more generally.

New Zealand

After inflation jumped from 3.1% in the March quarter to 4.1% in the June quarter, it was no surprise when the RBNZ increased the cash rate in July (see chart below). The RBNZ also argued that local financial conditions have recently eased and thus the economy could better handle a rate rise.

What this means for Australian Private Debt

July underlined the resilience of the Australian economy with a slight fall in inflation the cherry on top. Unless the conflict in the Middle East deteriorates and the price of oil skyrockets, the RBA is likely to leave rates on hold when it meets in August.