Good morning,

The funding plan most finance teams are still running rests on one belief: the consumer is tiring, and a tiring consumer eventually forces a rate cut. On 11 August the Reserve Bank held the cash rate and described consumer spending as slowing gradually, as it expected. Two weeks later the July spending figures landed and showed households spending more, not less, for a third month running. The cooling the cut is priced against is in the Bank's forecast, not yet in what people actually spend.

STANDING POSITIONS

• Pricing next year's funding to a rate cut: exposed · cash rate held 4.35 per cent
  
  

• Reading the consumer as weakening: fading · household spending up 1.1 per cent in July
  
  

• Waiting on the core rate to turn: watching · trimmed mean 3.6 per cent

SUPPORTING SIGNALS

• Household spending rose 1.1 per cent in July, a third straight monthly rise and 7.0 per cent higher than a year earlier, so the hard spending data firmed rather than cooled.
  
  

• The Reserve Bank held at 4.35 per cent on 11 August by a unanimous decision, said aggregate demand must stay subdued to bring inflation back to target, and named its only prospective move as a further rise.
  
  

• Headline inflation eased to 3.5 per cent in the year to July, from 3.8 per cent, but the trimmed mean the Bank targets held at 3.6 per cent, so the core rate that would license a cut has not moved.
  
  

• On a monthly basis the CPI rose 1.0 per cent in July, with automotive fuel up 7.5 per cent, so the near term inflation impulse the Bank is watching has not faded.

TODAY'S MOVE
The position that moved is the read on the consumer. On 11 August the Bank held and said spending was slowing gradually, as expected. The July figures, published two weeks later, showed spending rose 1.1 per cent, a third straight monthly rise, and sat 7.0 per cent above a year earlier. A cooling consumer is the premise the cut case rests on, and in the hard spending data that cooling is not yet there.

COST OF WAITING
The cost of the wait is the rate step you are exposed to, not the one you are hoping for. The only move the Bank has flagged is a further rise, so on an illustrative A$1,000,000 of floating debt a 0.25 percentage point step is about A$2,500 a year, and on an illustrative A$10,000,000 book about A$25,000 a year. A team funding to a 0.25 point cut while the flagged risk is a 0.25 point rise is carrying the gap between the two, a 0.50 percentage point swing worth about A$5,000 a year per A$1,000,000 and about A$50,000 per A$10,000,000. These figures are illustrative. A third monthly rise in spending does not settle the direction on its own, but it sits on the side of the rate the Bank has flagged, not the one the plan is hoping for. None of this is advice to refinance, defer, or draw anything.

THE READ
For most of this year the funding plan wrote itself around a weakening consumer. Prices would keep biting, households would pull back, demand would cool, and a cooling economy would eventually hand the Bank a reason to give the rate back. Next year's funding was priced to that sequence, and the consumer was the first link in it.

On 11 August the Bank held at 4.35 per cent, unanimously, and described spending as slowing gradually, as expected. It said demand must stay subdued to bring inflation to target, that inflation is not expected back near the midpoint until late 2027, and that its only flagged move is a further rise. Two weeks later the July figures landed: spending up 1.1 per cent, the third rise in a row, 7.0 per cent higher than a year earlier.

That is the link a CFO priced the wrong way. The cut case needs the consumer cooling, and the freshest data has it warming. Headline inflation did ease, but the trimmed mean held at 3.6 per cent and the monthly index rose 1.0 per cent, with fuel up 7.5 per cent. A consumer still lifting spending at 7.0 per cent a year is not the demand cooling that pulls a cut forward. It is spending that keeps price pressure alive, on the side of the rate the Bank says it may yet raise. The figures are the official releases; the read that firm spending works against the cut, not towards it, is ours.

The softening the funding plan is waiting for is in the Bank's forecast and not yet in the till. Priced against a cut, next year's funding is positioned for a consumer who is pulling back, while the freshest data shows one who is still spending.

THE TRIGGER
The marker is the Bank's next decision on 29 September, and the condition sits in the language, not the level. If the Board holds and still reads spending as slowing while keeping the line that demand must stay subdued and the next move could be up, funding priced to a cut stays on the wrong side of the Bank. If it drops that tightening bias, the cut case has its first footing this year. Watch whether the Bank still calls spending soft after a third monthly rise, not the cash rate line itself.

ONE LINE
If the consumer the cut is priced against lifted spending for a third month running, is next year's funding positioned for the household the Reserve Bank forecasts, or the one the July data actually found?

Thats What Matters