Upward pressure on global bond rates through the early part of the year extended on the back of strong US payrolls data. A more hawkish Fed, deficit concerns, and the policies of the incoming Trump administration continue to be bandied around. Spillover effects hit the UK this week as surging gilt yields once again put renewed focus on the sustainability of fiscal settings, with the Sterling weakening sharply in response. Sentiment was also dented by ongoing low inflation in China - stimulus efforts so far have fallen flat with markets. The euro remained under pressure despite December inflation data rising from 2.2% to 2.4%yr on a headline basis and core prices holding a steady 2.7% pace. Markets are priced for 3-4 ECB rate cuts in 2025.
A 256k rise in US nonfarm payrolls in December far exceeded modest expectations (165k) and saw the unemployment rate fall from 4.2% to 4.1%. The participation rate was steady at 62.5%, while average hourly earnings growth softened from 4% to 3.9%yr. Overall, labour market conditions are strong and pricing for further Fed easing has been pushed back into the second half of the year. The hawkish turn taken by the Fed at its December meeting was reflected in the minutes published this week.
Market expectations for a February RBA rate cut have strengthened to a 75% chance on the back of the December meeting minutes (published on Christmas Eve) and this week's inflation data. The minutes formalised the shift communicated by the RBA at the December meeting from actively pushing back against lowering rates to a more data-dependent approach. Accordingly, the Board acknowledged for the first time that it is prepared to lower rates 'in due course' if the data comes in line with or deteriorates relative to the RBA's forecasts (due to be updated at the February meeting); however, stronger data would delay cuts.
With increased scrutiny on the data flow, a decline in underlying or trimmed mean CPI from 3.5% to 3.2%yr in November bolstered pricing for a February start to RBA easing (reviewed here). Markets looked through an uptick in headline CPI from 2.1% to 2.3%yr due to that largely being driven timing differences in payments of state and federal government electricity rebate schemes. Meanwhile, an underwhelming 0.8% rise for November retail sales (vs 1% expected) confirmed the Black Friday sales event in 2024 as notably more subdued than in 2023, supporting the near-term RBA easing case (reviewed here).
On the other hand, the labour market remains strong and conditions were clearly tightening late last year highlighted by the unemployment rate falling to 3.9%. Alongside this, national job vacancies rose 4.2% for the 3 months to November, their first quarterly increase since mid-2022. In other Australian news, dwelling approvals declined by 3.6% in November (see here), while the trade surplus widened to $7.1bn as exports accelerated (see here).
