Australia June CPI continues to support our preference for barbell strategies

• June headline CPI eased to 3.8% y-o-y (from 4.0% in May), driven by lower fuel and goods disinflation. However, trimmed mean inflation remained sticky at 3.6% y-o-y, keeping RBA cautious.
• A profit warning from department store retailer Myer Group citing weak consumer sentiment across June and July signals that restrictive policy rates continue to weigh on discretionary spending.
• National property values posted their sharpest monthly decline since late 2022 (-0.4% MoM in June), driven by elevated borrowing costs, low auction clearance rates, and proposed federal tax adjustments on residential investments.
• With tight policy weighing on household balance sheets and property values, we believe RBA is likely near the end of its tightening cycle. We expect an extended pause, with at most one more rate hike if sticky core inflation persists.
• We reiterate our preference for High-Quality Bonds and Barbell Strategy: We continue to favour barbell strategy, preferring both short (around 1-year) and longer tenors (7 to 10-years) of the yield curve.

Easing Headline Inflation, but Stickiness in Core Inflation Remains

Australia’s latest June 2026 CPI data show sign of inflation cooling further, with headline inflation slowed to 3.8% y-o-y in June (down from 4.0% in May), driven lower by falling fuel costs and a moderation in alcohol and tobacco prices. In monthly terms, the headline CPI fell -0.1%, marking its second consecutive monthly drop.

However, trimmed mean CPI, RBA’s preferred measure remained flat at 3.6% y-o-y. Services inflation picked up to 4.0% (from 3.7% in May), while housing cost growth accelerated to 6.8% y-o-y due to high construction costs and persistent rental pressures.

While moderation in headline inflation prevents the immediate need for rate hikes, we believe sticky core inflation renders RBA equally in no rush to deliver immediate rate cuts.

Table 1: Recent Australian Inflation Trajectory (2026)

Sign of Pullback in Discretionary Spending

In its FY26 trading update, Myer Group, a major retail business operating department stores and apparel brands across Australia and New Zealand, highlighted a material drop in consumer sentiment. MoM sales in June and July were down, as cost of living pressures has resulted in weaker discretionary spending.

Chart 1: Myer Group 2H26 total sales

Other notable past examples also include Target, the department store chain owned by Australian retail conglomerate Wesfarmers. Although the management did not provide specific numbers, they have conveyed in half year ended 31 December 2025, that sales at Target fell due to tough trading conditions in discretionary apparel.

This growing sign of pullback in private consumption reinforces our view that household budgets are under strain, which also help constrain demand-side inflationary pressures.

Also, as private consumption typically accounts for over half of Australian GDP, this contraction in discretionary retail provides evidence that the higher interest rate is somewhat cooling aggregate demand. As household spending continues to soften, it reinforces broader signs that Australia's economic growth momentum is slowing.

Moderation in Property Markets

Adding to the drag on household wealth effect, Australia’s housing market has seen a softening across major capital cities. The Cotality Home Value Index recorded a 0.4% MoM decline in June 2026, the sharpest monthly drop in over three years.

Chart 2: Australia Cotality Dwelling Prices MoM

Table 2: Capital city auction clearance rates

While chronic structural supply shortages and immigration will prevent an outright price correction, the cooling housing market should also play a part in tempering inflationary pressures, in the sense of negative wealth effect would soften consumer spending.

Beyond its impact on consumer sentiment, a softening housing market may dampen credit expansion and contribute to housing-related turnover, further decelerate Australia’s economic momentum.

Yield Shifted Higher Since Last Update; Reaffirm Our View that It’s Close to Terminal Rate

Looking at Australia sovereign curve, it has shifted parallelly higher relative to 1 month ago, as markets priced in sticky core inflation alongside higher energy prices.

Chart 3: Australia sovereign curve

Currently, the RBA faces opposing dynamics that present a policy dilemma: persistent core inflation pressures on one side, and slowing economic momentum driven by a cooling housing market and weaker consumption on the other.

Nonetheless, these opposing forces validate that monetary policy is operating in somewhat restrictive territory, which reaffirm our view that the current rates are either already at, or close to terminal rates.

This aligns with our belief that the RBA is likely to maintain an extended pause, with at most one additional hike if inflation remains stickier. The next RBA decision will be announced on 11 August 2026 (Tuesday).

Recommendation

As such, we continue to favour a barbell approach, preferring both short (around 1-year) and longer tenors (7 to 10-years) of the yield curve.

Short-dated bonds (around 1-year) offer decent carry with minimal duration risk, serving as one of the safe harbour for investors seeking to park their cash and generate stable short-term income.

Conversely, longer-dated bonds stand to benefit should economic growth weaken further and bond yields decline. Investors who hold over a medium-term horizon stand to benefit from additional price appreciation as bonds “roll-down” to shorter maturities along the curve.

Within the corporate bond space, we remain positive on high-quality investment-grade issuers, particularly more defensive sectors such as major banks, supermarket operators and regulated utilities, which are better positioned to withstand a softer economic environment.

Table 3: Recommended bonds

(within the short ends)

(within the long ends)

(Some additional AUD selections available for self-directed trading on RMO)