A wide divergence across equity markets was evident this week as tech sector concerns continued to weigh in the US while semiconductor and AI infrastructure demand saw Asia surge. US labour market and inflation data supported the outlook for two Fed rate cuts this year, a headwind to the USD as Treasury yields fell across the curve. Political risk due to the ongoing uncertainty around PM Starmer was likely a factor in the underperformance of the GBP, while domestic influences on the EUR remain limited.
Stronger-than-expected US labour market data has reduced the near-term urgency for Fed easing, though expectations for two rate cuts this year still firmed this week after a downside surprise on inflation. The delayed payrolls data for January delivered a surprise as employment surged by 130k (9-month high) relative to the 65k consensus. That pushed the unemployment rate down from 4.4% to 4.3%, beating expectations to hold steady, while the broader underemployment rate fell to a 6-month low (8%). Signs of a tighter labour market were notable as labour supply increased in the month, with the participation rate lifting from 62.4% to 62.5%. Meanwhile, wage pressures cooled to show average hourly earnings growth easing from 3.8% to 3.7%yr.
US CPI data for January indicated inflation eased broadly across the economy. Headline CPI of 0.2% month-on-month saw the annual rate decline from 2.7% to 2.4%, below the 2.5% pace expected and its slowest since May 2025. Core inflation printed at 0.3%m/m, slowing the annual pace from 2.6% to 2.5% (as expected), a near 5-year low. Key aspects latched onto in the report were core goods inflation (1.1%yr) continuing to imply modest tariff-related effects on prices, while core services inflation (2.9%yr) fell to lows since mid 2021.
Public engagements by RBA officials reaffirmed that renewed inflationary pressures in Australia were behind last week's rate hike. At a Senate Estimates hearing, Governor Bullock said the incoming data would allow the Monetary Policy Board (MPB) to assess how entrenched higher inflation was likely to be, and whether or not further rate hikes would be required. Deputy Governor Hauser said that the economic conditions that required the RBA to be hiking now while other central banks were holding steady reflected its less aggressive strategy to return inflation to the 2-3% target. That strategy was implemented with the RBA's other mandate - maintaining the labour market at full employment - in mind. A speech by Assistant Governor Hunter highlighted that tightness in the labour market was consistent with above-target inflation.
