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%). 

Australian Q3 Wage Price Index 0.8%; 3.5%yr

A below consensus increase of 0.8% (vs 0.9% forecast) in Australia's Wage Price Index (WPI) in the September quarter saw annual wages growth retrace below 4% for the first time since the middle of 2023. Wage pressures are easing across the labour market with conditions past cycle tights and as wage-setting processes adjust to slower inflation. Annual wages growth slowed from 4.1% to 3.5%, well down from the highs of 4.3% seen at the end of last year. In both 3- and 6-month annualised terms, wages growth is now at 3.2%. 

While the RBA judges the labour market to be tight relative to full employment (more insights will be available in tomorrow's labour force survey for October), today's report suggests that inflationary pressures generated in the labour market are cooling. If a return to trend rates of productivity growth of around 1% can materialise, wages growth at the current pace would - on paper at least - be broadly consistent with inflation at the midpoint of the RBA's 2-3% target band.    

The WPI - a measure of the growth in base wages (excluding bonuses and other incentives) across a fixed basket of jobs in the domestic labour market - increased by 0.8% for the third consecutive quarter in Q3. This is notable because the wage-setting process in Australia typically generates a spike in wages growth in Q3, incorporating the increases to the national minimum wage and end-of-financial-year wage reviews for employees on individual agreements. Although this spike still occured in 2024, these factors boosted wages growth by less than last year. 

The Fair Work Commission - a statutory body independent of the political process that as part of its remit determines minimum wage and award rate settings in Australia - settled upon a 3.75% rise in the minimum wage in its 2024 decision, down from a 5.75% increase in 2023. Minimum wage decisions tend to have spillover effects on pay rates in other parts of the labour market. The ABS reported that an almost identical share of jobs received a pay rise in Q3 this year (45%) compared to last (46%); however, the average size of that pay rise in 2024 was 3.7%, significantly below the peak of 5.4% in 2023. Moreover, the distribution of wage rises now sees the largest share of jobs (34.1%) receiving a pay rise in the 3-4% range; whereas a year ago, this was sitting in the 4-5% range (for 27.4% of jobs). 

By sector, growth in private sector wages is cooling noticeably. The quarterly rise in Q3 was 0.8%, with annual growth slowing from 4.1% to 3.5%, a 2-year low. The average pay rise in the sector has slowed across the past year from 5.8% to 3.9%. Even if bonuses are included, private sector pay saw a more moderate increase of 1.7% quarter-on-quarter and 3.6% year-on-year than in 2023 (2.1%q/q, 4.3%Y/Y). 

In the public sector, wages increased by 0.8% in the latest quarter to be up by 3.7% through the year, softening from 3.9% previously and below the 4.2% cycle high. The average pay rise going through in Q3 was 3% compared to the high of 4.3% in the final quarter of last year. 

At the industry level, wages growth is now decelerating at a faster pace across major parts of the labour market. Of particular focus for the RBA has been wages growth in the services sectors. Based on the latest inputs, my measures of wages growth in business and household services show an easing from 3.7% to 3.2%Y/Y and 4.5% to 3.7%Y/Y respectively. 

Preview: Wage Price Index Q3

Australia's update of the Wage Price Index (WPI) for the September quarter (Q3) is due at 11:30am (AEDT) today. Robust labour market conditions have underpinned strong wages growth, and the RBA as recently as last week reaffirmed that at the current pace of around 4%, annual wages growth was inconsistent with its 2-3% inflation target given the prevailing weakness in productivity. This factors into market pricing that has RBA rate cuts out of the profile until mid-2025. Today's report is unlikely to shift this outlook even with wages growth moderating below 4% in Q3. 

Q3 Preview: Wages growth expected to hold a strong pace 

Headline wages growth is expected to come in at 0.9% in the September quarter, with estimates ranging from 0.8% to 1%; an outcome on consensus would slow annual growth from 4.1% to 3.6% - assuming no revisions to prior quarters. Wage settings in Australia are boosted in Q3 following end-of-financial-year wage reviews (for workers on individual agreements) and as the decisions on increases to the minimum wage from the Fair Work Commission start coming into effect. The size of the boost from these factors is expected to be down on last year, driving the forecast slowing in year-on-year wages growth.     

Labour market conditions remain tight by historical standards but have eased over the past year. The unemployment rate has lifted from an average of around 3.7% in Q3 2023 to 4.1% currently. Alongside this, the average pay increase in the private sector has slowed from a peak of 5.8% to 4.2% by Q2 this year. Meanwhile, the Fair Work Commission settled on a 3.75% increase to the National Minimum Wage in its 2024 decision, down from a 5.75% rise in 2023. 

A recap: Wages growth remained around 15-year highs in the June quarter  

The WPI increased by 0.8% in the June quarter - a touch soft relative to expectations (0.9%) -holding at 4.1% year-on-year, a pace little changed since the middle of 2023. Wages growth above 4% is tracking at its fastest pace since 2008/09, after falling to record lows of 1.4% during the 2020 pandemic crisis. The rebound was driven by the significant tightening that occured in the labour market coming out of the pandemic, with employment surging during a time of border restrictions, and wage-setting processes catching up to high inflation. 

Private sector wages growth is slowing with tightness in the labour market easing. Quarterly wages growth in the sector in Q2 was 0.7% - its slowest increase since late 2021 - with the annual pace moderating from 4.2% to 4.1%. In the public sector, wages growth in Q3 (0.9%) outpaced the private sector, though the annual pace was softer at 3.9%.   

Macro (Re)view (8/11) | US exceptionalism defines pivotal week

The reaction to the Republicans sweeping into power saw equities advancing to record highs alongside higher yields and a stronger dollar on Trump's pro-growth fiscal agenda, moves largely foreseen pre-election. However, across the course of the week, the curve inverted, with the Fed indicating it would move towards a more measured approach to easing. European assets were the clear point of weakness, equities underperforming and the euro falling with the prospect of increased tariffs intensifying the headwinds to the growth outlook and the implosion of the German government key developments. 

A 25bps rate cut from the Fed to 4.5-4.75% continued the process of recalibrating policy away from restrictive settings. While rates in the US will continue to fall, markets took away from the meeting that the pace of easing is likely to slow. Post-meeting pricing indicates that markets see the December meeting as a line-ball call between a hold or a 25bps cut, leaving the data to shape expectations one way or the other over the coming weeks. Over the next 12 months, rates are seen falling to the 3.75-4.0% range; however, that outlook will clearly be subject to the policies enacted by the new administration - something that Chair Powell would not speculate on during the post-meeting press conference. Away from the election, Chair Powell said the focus for Fed was in managing the risks to the economy from moving either too quickly or too slowly in returning rates towards a more neutral setting. Key observations on the economy from Chair Powell included downside risks to growth had eased; the labour market was no longer a major source of inflationary pressures; while core inflation remained elevated relative to the 2% target.   

A second cut for the easing cycle from the Bank of England (BoE) was voted through by the Monetary Policy Committee (MPC) in an 8-1 analysis, lowering Bank Rate by 25bps to 4.75%. The higher level of alignment amongst MPC members compared to the narrow majority (5-4) that cleared the first cut in August was dovish; however, with the UK budget measures expected to boost both growth and inflation, the guidance that a 'gradual approach' would be taken in dialing back restrictive monetary policy settings was reaffirmed. Market pricing implies the BoE is expected to continue to cut rates on a quarterly profile, with the next cut coming in February. Further out, markets see rates being cut to 4% by Q3 next year, up from 3.75% priced before the UK budget.    

The effects of the measures in the UK budget were incorporated into the BoE's latest forecasts in the November Monetary Policy Report. The BoE forecasts that the measures will boost growth by around 0.75ppt over the coming year, driving an uplift in the GDP growth outlook for 2025 from 0.9% to 1.7%. Stronger activity, however, is expected to add to inflationary pressures, pushing up the forecast for CPI in 2025 from 2.2% to 2.7%. This has lengthened the glide path for the return of inflation to the 2% target, pushed back from 2026 into 2027. While these are the modelled effects, there is significant uncertainty for the BoE in how the measures will work through the economy. Accordingly, the message from Governor Bailey in the post-meeting press conference was that the situation warranted moving cautiously in lowering rates. 

In Australia, the RBA remained on hold at 4.35% on the cash rate, bringing up 12 months of steady rates. Governor Bullock's pushback to rate cuts has not waivered and that has been a factor in markets repricing the first cut well out into the middle of next year. Updated forecasts published in the Statement on Monetary Policy were largely unchanged from the August round, with a return to the 2-3% inflation target band still projected for 2026 - despite the sharp decline in headline inflation in Q3. Detailed analysis of the RBA meeting is available in my review here. On the data front, a weakening terms of trade continues to see the trade surplus narrow coming in at $4.6bn in September (see here). 

Australia's trade surplus narrows to $4.6bn in September

Australia's goods trade surplus narrowed to a 6-month low of $4.6bn in September, a below expected figure ($5.3bn) and down from $5.3bn in August (revised from $5.6bn). Lower commodity prices continued to weigh on exports, posting their largest decline in 15 months (-4.3%) to be down more than 10% over the year. Imports also fell through the month (-3.1%), swinging annual growth from 3.2% to -7.8% - its weakest pace since the start of 2024. The overall dynamics are Australian dollar negative; a weakening terms of trade - export prices (-4.3%q/q, -6.8%Y/Y) are falling by more than import prices (-1.4%q/q, -1.1%Y/Y) - is compressing the trade surplus. 

September's trade surplus of $4.6bn was the narrowest since March, with the Bureau also revising lower its estimates of the surpluses reported over recent months. As a result, the 3-month average for the trade surplus came in at $5.1bn for the September quarter, its equal lowest since Q4 2020. 

Export earnings fell 4.3% in September to $40.8bn, a still-elevated level by any historical measure but well down from the peaks of 2022 when the tailwinds from the global recovery out of the pandemic drove up commodity prices. That cycle has retraced over the past year - the non-rural component of the RBA's index of commodity prices was down 14.5% (AUD terms) for the year to September - resulting in exports falling 10.2%. The chart below shows the main driver of that decline has been non-rural goods, a category dominated by the major resources. 

Quarterly exports moderated by 1.2% to $126.4bn, a near 3-year low. Key movements across the quarter were non-rural goods falling 1.9% on declines in other mineral fuels (mainly LNG) (-11.9%) and iron ore (-0.9%). This was partly offset by a 5.1% quarterly increase in rural goods as the value of meat (5%) and rural products exports (8.7%) lifted.    

Following declines of 1.1% in July and 0.2% in August, import spending contracted a further 3.1% in September to $36.2bn, down 7.8% on record highs from 12 months ago ($39.3bn). Driving the decline over the past year has been intermediate goods (-6.7%) - due to fuel imports falling (-12.8%) on lower prices - and capital (-16.9%) and consumption goods (-2.1%) weakening on softer domestic demand conditions.  

In quarterly terms, import spending eased 1.1% to $111bn, a level only marginally below the peak from the first quarter of the year ($113.4bn). The decline in the most recent quarter was driven by intermediate goods (-2.6%) - again due to falling fuel imports (-9.5%) on lower prices - and consumption goods (-1.4%), with weakness in vehicle imports (-9.2%) and household electrical appliances (-8.1%) the driving factors.   

RBA extends pause in November

The RBA left the cash rate on hold at 4.35% (and the ES rate at 4.25%) at today's meeting, marking 12 months of unchanged monetary policy settings in Australia. There was little reaction in either the bond or FX market, with pricing for an RBA rate cut remaining all the way out in May next year following today's decision statement, updated economic forecasts in the Statement on Monetary Policy, and Governor Bullock's press conference. The RBA has not moved from its assessment that aggregate demand in the economy is exceeding supply, reaffirming that rates need to be kept 'sufficiently restrictive' with inflation still not expected to return 'sustainably' to the 2-3% target range until 2026. 

The main shift in today's statement compared to the September meeting was the Board's emphasis on underlying inflation. This came after headline inflation declined from 3.8% to 2.8% year-ended in Q3, falling inside the 2-3% target range on electricity rebates and lower fuel prices. Today's statement noted that underlying inflation was a better gauge of the momentum of inflation, and at 3.5%Y/Y (down from 3.9%) it remained elevated to target.    

Accordingly, the Board clarified that its priority is to return inflation to target 'sustainably'. For this to occur, underlying inflation needs to decline further. In the post-meeting press conference, Governor Bullock highlighted that lower services inflation and an easing in the pace of wages growth will be key to achieving this. But this is expected to be a protracted process; based on today's updated forecasts, underlying inflation is not seen returning to the midpoint of the target until 2026, an outlook largely unchanged from the August forecast round. But there are risks to this outlook - both to the upside and to the downside - and Governor Bullock said the Board needed to gain greater confidence that underlying inflation is on track to return to target before it could consider cutting rates. 

The statement also focused on the strength of the labour market. Although conditions have eased, the RBA continues to assess that the labour market is tight relative to its judgement of full employment. Importantly, the RBA is neither seeking nor thinking that a deterioration in the labour market is needed to return inflation to target. For some time, the RBA has stated its strategy is to gradually bring inflation down in order to preserve the gains in employment achieved through the post-Covid cycle. 

All told, the RBA has retained its relatively hawkish tone compared to its G10 central bank peers currently cutting rates. The RBA is effectively data-dependent, and its messaging will start to shift if either employment or inflation deteriorates unexpectedly. The next RBA meeting is on 9-10 December.  

Preview: RBA November Meeting

Today's RBA meeting (decision due 2:30pm AEDT) appears relatively straightforward, with the Board expected to continue its on-hold stance leaving the cash rate at 4.35% - a setting unchanged since November last year. Markets have done much of the heavy lifting for the RBA ahead of today's meeting; since the September meeting, the 3-year yield has risen more than 50bps to trade above 4% and pricing for a rate cut has been pushed out to May 2025 from a 50/50 prospect in 2024. Key factors have been the hawkish repricing of the Fed outlook, while on the domestic front strong labour market data has been given more weight than slowing inflation in Q3 driven by one-off electricity rebates. This gives the RBA cover to hold its hawkish line of keeping rates 'sufficiently restrictive' while many of its central bank peers overseas continue to cut rates. 

After leaving markets with the sense that policy was calibrated appropriately to balance the risks to its employment and inflation objectives at the conclusion of the September meeting, little is expected from the RBA today. The strength of the domestic labour market has been reaffirmed with employment surging 64.1k in September, holding the unemployment rate to 4.1% as participation lifted to a new record high (67.2%). The Q3 CPI report showed inflation is falling a little ahead of the RBA's forecasts from August; headline inflation slowed from 3.8% to 2.8% and trimmed mean (or core) inflation eased from 3.9% to 3.5%. 

These forecasts will be updated in the quarterly Statement on Monetary Policy that will accompany today's decision, but one inflation report where the declines were driven largely by temporary, volatile factors (electricity rebates and fuel prices) is unlikely to prompt a material revision to the RBA's current outlook for inflation to return to the inflation target 'sustainably' in 2026. For a relevant comparison, the ECB required multiple forecast rounds where inflation surprised to the downside before it was confident enough to start its easing cycle.

Overall, the combination of a robust labour market and inflation still seen some way off from sustainably holding in the target range sets up for the RBA to broadly reaffirm its messaging from September. Expect Governor Bullock in the post-meeting press conference to repeat that rate cuts are not on the radar, with more progress needed on inflation before it can move into an easing cycle.