Macro (Re)view (29/11) | Volatility rises

Volatility in currency markets picked up this week on President-elect Trump's pledge to impose tariffs on Canada, Mexico and China over border control and fentanyl flows. Central bank divergence was also a factor - a Fed pause was raised in the November minutes; the ECB looking less likely to cut by 50bps; a hike from the BoJ in December on the radar; and the RBA remaining firmly on hold. Bonds rallied as Trump's call to name Scott Bessent as Treasury Secretary was seen as a market-friendly appointment regarding the scale of future US government deficits. Equities were modestly higher across the board in a holiday-shortened week in the US. 

RBA Governor Bullock reaffirmed the central bank's hawkish view of the rates outlook in Australia, highlighting that inflationary pressures are holding the Board back from easing monetary policy. Although encouraged by declining headline inflation - reported in the monthly indicator this week to be at a 2.1%yr pace in October, down from 4%yr in May (see here) - Governor Bullock said this has been expected due to the effects of government electricity rebates and lower fuel prices. The RBA is instead focused on underlying inflation that remains elevated to the 2-3% target band, a signal Governor Bullock maintained was consistent with demand exceeding supply. 

Another key factor behind the RBA's reluctance to join the global easing cycle is that a cash rate of 4.35% is judged to be less restrictive than the stances of its central bank peers now cutting rates. Governor Bullock reiterated that the Board's strategy had been to gradually return inflation to target by raising rates less aggressively in order to protect the gains made in the labour market. In other RBA news, the Senate has passed legislation that will bring about major reforms to the board structure - separating its current responsibilities of monetary policy and operational matters across what will be two newly appointed boards - in changes that stem from the RBA Review handed to the Treasurer in March 2023. 

Positive details for construction activity (1.6%) and capital expenditure (1.1%) in the September quarter were received ahead of next week's National Accounts. The Australian economy looks to have expanded by around 0.4% in Q3, an improvement from recent quarters as more encouraging dynamics emerged for household consumption. My detailed preview of the GDP report is available here.

In the US, the minutes of the Fed's November meeting noted that the Committee would consider pausing its easing cycle if the balance of risks to the outlook were to shift or if inflation remained elevated. Data this week showed that the Fed's preferred core PCE deflator posted a 0.3% rise in October - its fastest month-on-month rise since March - firming from 2.7% to 2.8% at an annual rate. The Committee is currently in the position of weighing up the risks of easing monetary policy too quickly - which could renew inflation pressures - against the risk of easing too slowly - which could damage growth and the labour market.   

Weak growth into the risk of trade tariffs continues cloud the outlook for the export-oriented euro area economy. Pricing for a 50bps ECB rate cut in December had built up on these dynamics only to be pared back this week; euro area inflation lifted from 2% to 2.3%yr in November (as expected) while the core rate remained at 2.7%yr (vs 2.8%), while comments from ECB officials were also influential. ECB Chief Economist Lane said that in his view the euro area was in a 'cyclical recovery' phase; Executive Board member Schnabel pushed for a gradual approach to policy easing - highlighting monetary policy as an ineffective tool to address structural weaknesses that are weighing on growth; and ECB President Lagarde said it was too early to be conclusive on the inflationary and growth impacts tariffs may have. Taking a more dovish tone, the ECB's Villeroy said weak growth and the risk of inflation undershooting the 2% target could warrant rates being cut below neutral. 

Preview: Australian Q3 GDP

Australia's National Accounts for the September quarter are due for release today (4/12) at 11:30am (AEDT). Growth was subdued over the first half of 2024; however, more encouraging signs began to emerge around households in Q3 as inflation cooled and fiscal support measures came into effect. Expectations are for the Australian economy to have expanded by around 0.5% in the quarter.  

A recap: Growth stuck in slow lane 

Growth in the Australian economy remained in the slow lane in the June quarter as real GDP increased by just 0.2%, easing annual growth (1.0%) to lows outside of the Covid period since the early 1990s. Higher interest rates and elevated inflation have been major headwinds to growth, dampening household spending and pressuring corporate profit margins. The RBA has remained a hawkish outlier amid the global easing cycle, highlighting that demand-supply imbalances (despite slower growth) and weak productivity pose upside risks to inflation.

Public demand - a key underpinning of growth over the past year - remained robust in Q2 (0.8%), bolstering the economy from stalling private demand (0%). Household consumption was weak in the June quarter falling by 0.2% on a pullback in discretionary-related demand (-1.1%), evident in categories such as hospitality services and travel. Cooling inflation has enabled real incomes to stabilise from the substantial declines in 2022 and 2023; however, interest rates remain elevated and the saving rate is low - factors that have made households reluctant to spend in non-essential areas. 

Higher interest rates have also weighed on residential construction activity and components of business investment. Reduced spending by overseas visitors and students - reflected in weaker contributions to growth from net exports - has also played a role in the economic slowdown. 

Q3 preview: Households beginning to stir   

The global backdrop remained challenging for Australia as commodity prices declined and weak growth forced the hand of major central banks to ease monetary policy during Q3. Outside of the US, growth in advanced economies was subdued as household consumption remained under pressure. In China, lacklustre growth prompted the authorities to announce a range of monetary and fiscal stimulus measures. 

In Australia, the dynamics became more favourable for household consumption during Q3. Real incomes were supported by a range of factors including ongoing resilience in the labour market; a sharp slowing in inflation due to government rebates on electricity bills; and the Stage 3 tax cuts. In response, consumer sentiment was lifting into year-end, rising from the very pessimistic levels of the past couple of years. 

Quarterly retail sales volumes rose at their strongest pace (0.5%) since the middle of 2022 driven by growth across the discretionary categories (0.9%). Spending on services also showed signs of stronger growth in Q3. 

Labour market conditions continued to defy the slower growth backdrop, supporting household consumption. Employment, on net, accelerated by nearly 157k or 1.1% in the quarter - its sharpest increase since early 2023 - generating a 0.8% lift in hours worked. Strong employment growth has held the unemployment rate to low levels just above 4% as labour force participation increased to record highs. 

Summary of key dynamics in Q3

Household consumption — Real incomes have stabilised, and the Stage 3 tax cuts and government rebates started to flow through in Q3. There are tentative signs that these factors supported a modest rebound in household consumption; retail sales volumes rose by 0.5% in the quarter on discretionary-led gains in clothing and footwear and household goods.   

Dwelling investment — An increased inflow of dwelling approvals and an easing of capacity constraints saw residential construction activity rise by 1.9% in the quarter, its strongest outturn since late 2022.  

Business investment — Private sector capital expenditure lifted by a solid 1.1% in Q3 following a decline in the previous quarter. Responding to capacity pressures and investing in new capabilities in data centres and manufacturing are key priorities for Australian firms.  

Public demand — Expanded at a robust 2.1%q/q pace, driving GDP growth in the quarter. Federal and state government cost-of-living support measures were a key driver of public spending (1.4%). New investment surged (5.3%) following two consecutive quarterly declines, supported by the large pipeline of public infrastructure work. 

Inventories — Deducted 0.4ppt from quarterly growth. Private non-farm inventories were a headwind as inventory overhangs were run down in consumer-facing sectors. This was partly offset by a modest contribution from public sector inventories (0.1ppt). 

Net exports — The external sector added a modest 0.1ppt to output in Q3. Export volumes (0.2%) were supported by a rebound in resources shipments (1.7%), while imports contracted (-0.3%) on weakness in fuel and consumer goods. 

Australian Capex 1.1% in Q3; 2024/25 investment plans $178bn

Australian private sector capital expenditure rose broadly in line with expectations lifting by 1.1% in the September quarter. Capex was coming off a 2.2% decline in Q2 - its only quarter-on-quarter decline in the past 4 years as business investment accelerated coming out of the pandemic. Firms' forward-looking investment plans were upgraded in line with historical ranges to be pressing $180bn for the 2024/25 fiscal year - its highest level since the mining investment boom.   

Gains of 1.1% across buildings and structures and equipment, plant and machinery investment drove capex to rise by 1.1% in Q3 (1.0%Y/Y). Business investment has slowed over recent quarters but remains in an upswing phase post the pandemic, with firms responding to capacity pressures brought on by strong demand, and to upgrade to new technology - including data centres and renewable energy. 

Non-mining capex lifted by 2.3% in the latest quarter, up 3.6% through the year. A 3.5% rise was seen in buildings and structures - the ABS's liaison highlighting that investment in manufacturing capabilities and data centres were the key factors - while equipment, plant and machinery spending advanced by 1.4%. Equipment investment stands almost 23% above pre-Covid levels, with spending on new vehicles and software upgrades contributing to the upswing.   

In the mining sector, capex declined by 1.9% to be down 5.2% on a year ago. Capex in the mining sector has remained broadly stable over recent years following the winding down of the investment boom - a dynamic surging commodity prices post Covid were unable to change as the focus among mining firms was to sustain rather than expand production. 

Today's report included firms' 4th estimates of investment plans for the current 2024/25 fiscal year. Capex plans came in at a figure of $178.2bn, a level last seen near the peaks of the mining investment boom. This forecast represents an upgrade of 5.1% on estimate 3 put forward 3 months ago, tracking towards a 7.5% increase on a year-to-year basis (i.e. compared to estimate 4 for 2023/24). The magnitudes of these upgrades are broadly consistent with what the capex survey has historically reported since its inception in the late 1980s. Excluding today's figures, the average upgrade from estimates 3 to 4 has been 5.5%, and 5.3% on estimate 4 from the previous year.   

Going into a more detailed breakdown, investment plans in the non-mining sector were upgraded by 6.7% on estimate 3 to $124.5bn. This included a 10.1% rise in planned spending on equipment ($59.3bn) and a 3.8% lift in the buildings and structures component ($65.2bn). Mining capex plans saw a modest 1.4% uplift on estimate 3 to a $53.7bn figure, a 9-year high. This was driven by a 3.2% increase for equipment ($14.4bn), with buildings and structures up 0.8% ($39.3bn).      

Australian construction work done 1.6% in Q3

Australian construction activity lifted by 1.6% in the September quarter, outperforming the 0.5% consensus figure to post its strongest outcome since Q4 2023. Headwinds to the construction sector from higher interest rates and capacity pressures remain but could be easing. Momentum in the residential segment has improved as dwelling approvals lifted to a 2-year high in Q3, while the large pipeline of public infrastructure projects continues to support engineering work. 

Ongoing strength in engineering work (2.6%) and an improving residential sector (1.8%) drove construction activity to a 1.6% rise in the latest quarter. This solid result together with upward revisions that reduced the decline in output reported over the first half of 2024 from -1.9% to -0.6% paints a more upbeat picture of construction activity than going into today's report - albeit with growth heavily lopsided to the public sector (9.9%Y/Y) over the private sector (0.6%Y/Y).    

Engineering work (2.6%q/q, 6.0%Y/Y) remains the growth engine of the construction sector. Infrastructure investment and the transition to renewable energy sees engineering work by the public sector running at a 13.1% pace over the past year. 

Private sector residential construction activity lifted by 1.9% in Q3, its strongest rise since Q4 2022. Momentum in new home building continues to improve following an uplift in dwelling approvals to their highest quarterly total in two years in Q3. Easing capacity pressures in the sector for labour may also be playing a role. 

In the non-residential segment, work done by the private sector declined by 2.5% in the quarter, more than reversing a 1.8% lift in Q2. Activity trended upwards coming out of the pandemic but now looks to be levelling out. 

Australian CPI 2.1% in October

Australian headline CPI inflation came in at an unchanged 2.1%yr on the ABS's monthly indicator in October, defying expectations for an upside drift to 2.3%. Government rebates on electricity bills and lower fuel prices are driving disinflationary progress, taking headline CPI down from a 3.8% pace in June. In spite of this, reduced rate-cut expectations in the US and solid domestic labour market data have seen the RBA outlook hawkishly repriced where markets have pushed back the timing of a rate cut well into 2025. 

Headline CPI remained at lows back to July 2021 after holding at 2.1% in October. Base effects were expected to see CPI firm to 2.3%; however, prices fell 0.3% in the latest month - matching the decline from 12 months ago - on federal and state government electricity rebates and lower fuel prices. The disinflationary impulse from these components is reflected in headline CPI falling in both 3-month (-1.9%) and 6-month (-0.2%) annualised terms. 

Electricity prices have fallen by 35.6% over the year - the most on record - while fuel prices are down 11.5%yr. Other volatile price categories showed only limited movement in October: food and non-alcoholic beverages holding at 3.3%yr and alcohol and tobacco softening to 6.0%yr from 6.3%yr in September. 

Underlying price pressures showed mixed progress across the various measures. CPI ex-volatile items ticked down from 2.7% to 2.6%yr, while a broader, seasonally adjusted measure that also removes holiday travel eased from 2.7% to 2.4%yr - its slowest pace since November 2021. The softer readings on these gauges contrasted with a firming in the trimmed mean CPI from 3.2% to 3.5%, a reversal of recent progress to print at its highest since July. 

The more elevated pace on the underlying gauges relative to headline CPI remains underpinned by services inflation, which firmed from 4.4% to 4.8%yr on the back of increases across rents (6.7%yr), holiday travel (8%yr) and insurance and financial services (6.3%yr). 

This contrasts with substantial disinflation in goods prices to 0.1%yr, of which electricity and fuel are key components. The October report contained only limited updates on services prices, but the overall dynamics of services inflation and goods disinflation are the same as what central banks in many other advanced economies are contending with.  

Macro (Re)view (22/11) | ECB 50bps on the cards

Sentiment across markets was buffeted this week by a range of crosscurrents. Equity markets were broadly mixed across regions, the US dollar remained bid while long-end yields responded to escalations in the war in Ukraine and growth concerns in Europe. Weak PMI data for the euro area sent the EURUSD cross to two-year lows as markets increased bets for a 50bps rate cut from the ECB at the December meeting.   

Trump's appointment of Scott Bessent to head up the Treasury department was the major news out of the US this week amid a light data calendar. Bessent, a hedge fund manager, is understood to have received the nod over the former Fed governor Kevin Warsh who the WSJ had reported was the frontrunner to land the key role ahead of a potential move to take over from Jerome Powell as FOMC Chair at the end of his tenure in 2026. 

A series of weak PMI readings renewed concerns over growth in the euro area. The composite PMI gauge fell to a 10-month low sliding from 50 to 48.8 in November, a level indicating economic activity contracted in the month. Resilience in the services sector gave way as activity declined (51.6 to 49.2) and joined the manufacturing sector (46 to 45.2) in contractionary territory. The report firmly puts a 50bps rate cut from the ECB in December on the radar. Recall that the ECB cited weakness in the forward-looking PMIs as a key factor in its decision to cut rates by 25bps in October.

In the UK, stronger-than-expected inflation data on the back of the recent Budget have firmed pricing for a gradual BoE easing cycle - markets see 2-3 rate cuts over the next 12 months. Higher energy prices pushed up headline CPI from 1.7% to 2.3%yr (vs 2.2% forecast) in October, but firmer core inflation (3.2% to 3.3%yr) and services prices (4.9% to 5.0%) will be of more concern to the BoE. Recall that Governor Bailey recently said that rates would need to 'remain restrictive' until disinflationary progress broadens. Appearing with other BoE policymakers (Lombardelli, Taylor and Mann) before the Treasury Committee this week, Governor Bailey said that a cautious approach to easing was warranted due to uncertainty around how the rise in payroll tax announced in the Budget will play out in the economy, whether firms pass through higher prices or adjust wages or employment.  

The minutes of the RBA's November meeting conveyed that policymakers were still awaiting more disinflationary progress before considering rate cuts. Markets picked up on a line that for the Board to lower rates, it would need to see 'more than one good quarterly inflation outcome'. Assuming that the Q3 CPI report where headline CPI slowed sharply qualifies as a good report, the Q4 CPI report due late January could put rate cuts back on the radar. The recent hawkish repricing of the RBA outlook has seen the timing for the first cut pushed out to the second half of next year.  

Macro (Re)view (15/11) | Hawkish Fed repricing continues

Equities saw broad-based declines from stretched positioning this week; the steepest falls came in Asia where stimulus efforts in China have fallen short of inspiring markets and on weaker sentiment post the US election. Growth and rate differentials continue to work in favour of the US dollar - 2- and 10-year Treasury yields are up 70bps since the Fed started its easing cycle in September - and markets now see a cut at the December FOMC meeting as 50/50. 

Fed Chair Powell delivered a slightly stronger message than at last week's meeting by telling markets that 'the economy is not sending any signals that we need to be in a hurry to lower rates'. A Fed signalling it is seeking greater optionality sees market pricing for a rate cut in December as a finely balanced call. The next nonfarm payrolls report will be key after the numbers in October were affected by hurricanes and industrial strikes. Inflation also gives the Fed reason to be cautious. Chair Powell remarked that while the Fed is confident inflation is headed back to the 2% target on a sustainable basis, the journey is a 'sometimes-bumpy path'. Case in point was the October CPI report; a 0.2%m/m rise saw headline CPI tick up from 2.4% to 2.6%yr, while the core rate at 0.3%m/m was on the strong side of what the Fed would like to see, leaving the annual pace at a still-elevated 3.3%.   

A subdued growth outlook for the euro area published by the European Commission speaks to the ECB's risk management approach to cutting rates. In its Autumn update, the Commission left its 2024 GDP growth forecast at 0.8% but lowered its forecast for 2025 from 1.4% to 1.3%. Significant uncertainty hangs over the outlook for the euro area next year, with the Commission highlighting that downside risks had increased with trade tariffs looming. The account of the ECB's October meeting outlined that the decision to cut rates by 25bps was taken largely to guard against the Governing Council falling behind the curve after seeing PMI readings on economic activity come in weak. Growth concerns are also evident in the UK. September quarter GDP growth slowed to 0.1%q/q to be up by a moderate 1.0% through the year. Speaking this week, BoE Governor Bailey outlined that addressing poor productivity was key to turning around the growth outlook in the UK. 

The hawkish repricing of the RBA rates outlook received validation from solid Australian labour market data. The swaps market has adjusted from pricing a rate cut in 2024 as a 50/50 chance as recently as September to now having cuts fully priced out until the back half of 2025. A key factor in this has been the resilience of the domestic labour market. Although employment surprised to the downside for the first time in 7 months with a 15.9k rise in October (vs 25k consensus), the headline unemployment rate was unchanged at 4.1% (see here). This remains at a historically low level in Australia, while broader measures of spare capacity continued their recent tightening - underemployment declining from 6.3% to 6.2%, an 18-month low. The continuation of solid momentum in employment - the 3-month average has been in the 40-50k range over recent months - can sustain these dynamics.

Importantly, robust employment demand has been met with increased supply; while the participation rate eased in October to 67.1% it remains around record highs and materially above pre-pandemic levels. This has helped rebalance the labour market, evidenced by wage pressures that are now cooling. Growth in the Wage Price Index came in slightly below expectations rising by 0.8% in the September quarter (vs 0.9%), with annual growth moderating from 4.1% to 3.5% (see here). As the RBA has been outlining for some time, the pace of sustainable wages growth in the economy over a policy-relevant timeframe - one consistent with 2-3% inflation - will depend on productivity growth. 

Australian employment 15.9k in October; unemployment rate 4.1%

Australia's unemployment rate remained at 4.1% in October despite employment posting its slowest rise in 8 months of 15.9k. Market reaction to today's report was minimal; simply put, labour market conditions remain robust and this is seeing pricing for an RBA rate cut coming no sooner than in the second half of 2025.     

By the numbers | October 

• Employment lifted by a net 15.9k in October (full time +9.7k/part time +6.2k), missing the consensus figure (25k) for the first time since March. September's employment outcome was revised to a 61.3k increase, down from 64.1k previously.  
• The headline unemployment rate was unchanged at 4.1%, as expected; however, at 2 decimal places it lifted from 4.08% to 4.13%. The broader underemployment rate tightened from 6.3% to 6.2%, declining to its lowest since April 2023. Total labour force underutilisation was steady at 10.4%. 

• Labour force participation eased from record highs to print at 67.1% from 67.2% previously. The employment to population ratio was down 0.1ppt to 64.4%

• Hours worked ticked up by 0.1% in the month, firming annual growth from 2.4% to 2.5% - its fastest pace in 13 months. 

The details | October  

Markets already appear to have quickly looked past today's report. Employment slowed to a 15.9k rise in October, its weakest outcome since March and below expectations for 25k; however, markets were unperturbed given they have seen Australia's monthly employment outcomes come in topside of consensus since the Autumn. Both full time (9.7k) and part time employment (6.2k) contributed positively to the headline figure. After October's outcome, the 3-month average increase in employment moderated to 41k from 52.2k. 

Despite the notably slower rise in employment in October, the national unemployment rate held at 4.1% - in line with its 3-month average but above the cycle lows of 3.5% in late 2022/early 2023. An easing in the participation rate from 67.2% to 67.1% was key to the unemployment rate remaining unchanged. In my preview of today's report, I highlighted that over recent months, labour market conditions have started to tighten again. Further evidence of this was seen with the underemployment rate falling from 6.3% to 6.2% in October, an 18-month low. The overall underutilisation rate remained at 10.4%, down from the levels seen during the middle of the year. 

The broader retightening of the labour market has occured alongside hours worked finding momentum. Hours worked lifted in October (0.1%), continuing a run of increases since the middle of the year, to be up 2.5% on 12 months ago.   

In summary | October  

Australia's labour market remains in robust shape; there is strong momentum behind employment - with forward-looking indicators, including unemployment expectations in this week's Westpac-MI consumer sentiment survey - pointing to this continuing; unemployment is low and participation is around record highs. These dynamics will likely reaffirm the RBA of its view that the labour market remains tight relative to full employment, a key underpinning of its hawkish narrative to near-term easing prospects to which the market has yielded to. However, there are signs that the inflationary pressures stemming from the labour market are easing following yesterday's report that showed growth in the Wage Price Index cooling to a 3.5% annual pace in Q3 (see here). 

Preview: Labour Force Survey — October

Australia's Labour Force Survey for October is due to come across the screens at 11:30am (AEDT) today. Strong labour market conditions continue to defy Australia's growth slowdown, a key factor in markets pricing out RBA rate cuts until the second half of next year. Another solid report is expected today, building on the strong run of monthly employment gains that started in the Autumn. While the RBA assesses that the labour market remains tight relative to full employment, the slowing in the Wage Price Index to 3.5% in Q3 reported yesterday indicated that inflationary pressures stemming from the labour market are cooling.    

October preview: Momentum with another above-consensus employment outcome  

Markets go into today's report expecting once again to see employment moderate; the median forecast is at 25k, with estimates ranging from 10k to 40k. The past 6 reports stretching back to April have all seen employment surprise topside of consensus, which has been in the 20-25k range. Given this run of form and the current momentum of employment - the 3-month average to September was 51.9k - another above-consensus outcome appears a strong chance. 

The unemployment rate is expected to remain at 4.1% (range: 4.0% to 4.2%), based on an unchanged participation rate (67.2%). However, with participation at record highs, the risk of an uptick in the unemployment rate remains prevalent if employment loses momentum. 

September recap: Employment rises at 7-month high 

Employment surged to a 64.1k rise in September, its strongest increase since February and the 6th consecutive outcome that came in above expectations. Full-time employment (51.6k) led the way, with support from the part-time segment (12.5k). In addition to the gains in July (43.7k) and August (46.6k), employment lifted by 155.6k (or 1.1%) across the quarter, its best quarterly outturn since Q1 last year. 

Underlining the strength of employment, the national unemployment rate stayed at 4.1% in September as labour force participation lifted to a new record high of 67.2%. Furthermore, the employment to population ratio - the share of Australians in work - rose to match its earlier peak of 64.4%, a materially higher level than in the pre-pandemic labour market. 

Overall, conditions in the labour market have tightened modestly in recent months; underemployment declined from 6.5% to 6.3% in September, averaging 6.4% in the quarter (down from 6.6% in Q2), while underutilisation fell from 10.6% to 10.4%, down from an average of 10.6% in Q2 to 10.5% in Q3.  

Hours worked advanced for the 4th month in succession posting a 0.3% increase in September. Annual growth lifted from 1.7% to 2.4%, a 12-month high. Growth in part time hours (4.5%) strongly outpaced the full-time segment (1.9%) over the past year, reflecting faster growth in part time employment (4.2%) relative to full time (2.6%).