Macro (Re)view (23/1) | Markets Sidestep Tariff and JGB Turmoil

Markets got away relatively unscathed from what might have been a damaging week amid new trade and geopolitical tensions and a significant JGB market selloff. Risk assets rebounded after President Trump confirmed at the Davos forum that the tariffs threatened last weekend on eight European countries (including the UK) had been averted for now by the framework agreement over Greenland, though the details are limited. Meanwhile, Japanese bond yields steepened sharply on fiscal sustainability concerns (30s +16bps this week), but the spillover to other regions ended up fairly contained. In FX, higher rates gave support to an ailing JPY as the BoJ left policy on hold, but the standout was the local AUD. Key factors to AUD strength were the broader risk rebound and strong domestic labour market data, which boosted RBA February rate hike pricing to around 50%.    

Data release in the US took a back seat to events in Davos and had little market reaction. The Fed is firmly expected to remain on hold at next week's meeting, a stance reaffirmed as the core PCE deflator - its preferred inflation metric - firmed as expected from 2.7% to 2.8%yr in November. Fed forecasts updated late last year showed an expected decline to 2.5% over the course of 2026 before settling around the 2% target in 2027. Data on the consumer was solid with Black Friday sales boosting personal spending by 0.5% in November and 0.3% in real terms. Real spending in annual terms is now tracking at 2.6%, moderating from a 3.2% pace a year earlier.

In the UK, headline CPI inflation lifted a touch from 3.2% to 3.4%yr in December, above the 3.3%yr consensus due largely to temporary factors (tobacco taxes and holiday travel). More importantly from a Bank of England standpoint, core inflation at 3.2%yr and services inflation at 4.5%yr were below its forecasts and 0.1ppt under market expectations. Meanwhile, softness in the labour market was highlighted by unemployment printing at an unchanged 5.1% in November - up from 4.4% a year ago - and wages growth (ex-bonuses) slowing to a 4.5% annual pace, its lowest since early 2022. This all supports continued BoE easing, with two rate cuts expected in 2026.  

  

Resurgent employment growth of 65.2k drove Australia's unemployment rate down to a 7-month low of 4.1% in December as the labour market rediscovered form at the end of 2025 (see here). A hawkish repricing of the RBA outlook followed the report, a February rate hike now considered a line-ball call and a lock by May. The deciding factor will likely be next week's December quarter CPI report, with the RBA more concerned about renewed inflationary pressures than the labour market overheating. The December labour market update is also likely to be seen in the context of an indifferent run through much of the back half of 2025.

The 65.2k rise in employment was well above the 27k figure expected, rebounding off a 28.7k fall in November. This was the strongest gain in 8 months, with the full time segment (54.8k) leading the way. That made inroads into the unemployment rate, which fell from 4.3% to 4.1% - its lowest since May - but was assisted by only a modest rise in the participation rate to 66.7%. Nonetheless, sizeable declines in the underemployment rate from 6.2% to 5.7% and in total underutilisation from 10.5% to 9.8% - a 2½-year low - were clearly consistent with a broad retightening of labour market conditions.

Australian employment 65.2k in December; unemployment rate 4.1%

A strong Australian labour force report for December (released today) has lifted market pricing for an RBA rate hike in February to as high as 50%, with a 25bps hike now fully discounted by May. The labour market rediscovered form to end 2025 with employment rising by 65.2k (vs 27k) - its most in 8 months - and the unemployment rate falling to 4.1% (vs 4.3%) - its lowest in 7 months.   

By the numbers | December 

• Employment increased by 65.2k - its strongest result in 8 months - to outperform the 27k consensus. This was a significant rebound from the fall in November that was revised to -28.7k from -21.3k.
• The national unemployment rate fell from 4.3% to 4.1%, defying expectations to hold steady as it returned to its lowest level since May 2025. The underemployment rate fell from 6.2% to 5.7%, reversing it rise from November. Total underutilisation fell from 10.5% to 9.8%, a 2½-year low. 
• Labour force participation rose to 66.7% from a downwardly revised 66.6% last time out, while the employment to population ratio lifted from 63.8% to 64%.     
• Hours worked rose by 0.4% month-on-month (1%yr) to be up by 0.6% over the December quarter.

The details | December 

Employment (65.2k) rose at an 8-month high in December, led by a 54.2k rise in full time employment while part time employment lifted by 10.4k. This was after a surprisingly weak result in November where employment was down by 28.7k, its weakest figure since December 2023 as full time employment saw a large fall (-65.2k) while the part time segment saw solid growth (36.6k).  

  

Across the December quarter, employment lifted by almost 74k to average out at growth of just under 25k per month in the period - similar momentum to the June quarter. Employment growth clearly slowed over the September quarter but has then improved into year-end.   

The headline unemployment rate falling to 4.1% marked its lowest level since May 2025. And that was backed up by the underemployment rate declining from 6.2% to 5.7%. Overall, combining the two measures, total underutilisation in the labour force tightened substantially falling to 9.8% in December, its lowest since April 2023, from 10.5% in November. Participation in the labour force rose slightly to 66.7% in December, still at a high by historical terms but down from cycle highs north of 67% over the back half of 2024 and into 2025.     

Hours worked rose by a respectable 0.4% month-on-month in December, matching the increase in employment (in percentage terms). Across the quarter, hours worked expanded by 0.6%, representing a notable lift in momentum after a flat September quarter (0%).  

In summary | December

Today's report was a strong improvement from the indifferent prints seen through much of the back half of 2025. A February rate hike priced as a 50/50 prospect seems a touch overdone in that context, particularly as the RBA's overarching strategy has been to allow the labour market to run a little hot while it returns inflation to the target band. The unemployment rate averaged 4.2% in the December quarter, slightly tighter the RBA's forecast for 4.4%. Next week's Q4 CPI report will hold more weight with the RBA in terms of its decision in February. 

Preview: Labour Force Survey — December

Australia's Labour Force Survey for December is due today (1130 AEDT). This is one of two key data points - the other being next week's Q4 CPI report - ahead of the RBA's first meeting for 2026 on February 2-3. Markets are pricing in around 50bps of tightening this year, though a hike isn't expected until May.  

December preview: Rebound expected 

Expectations are somewhat more elevated going into today's report after employment contracted by its most since February 2025 in October (-21.3k). Employment is forecast to rise by 26.5k (9-month high), with estimates ranging from 18-45k. As the chart below shows, outcomes for employment (green line) have been highly volatile throughout 2025, so forecasts are generally held with relatively little conviction.    

The unemployment rate in December is expected to tick up to 4.4% (range: 4.3-4.5%) from 4.3% in the prior two months. Much will depend on the participation rate as to where the unemployment rate comes in. A rise in the unemployment rate is expected partly because participation will be anticipated to rebound after falling to an 8-month low in November. 

November recap: Employment slides but unemployment holds at 4.3%  

Employment unexpectedly fell by 21.3k in November against an anticipated rise of 20k, its weakest result in 9 months. This was driven by the largest decline in full-time employment since December 2023 (-56.5k), though that was moderated by a gain in part-time employment (35.2k). 

 

Despite employment falling, the national unemployment rate remained steady at 4.3%. That was due to the participation rate declining from 66.9% to 66.7%, which equated to an estimated reduction to the labour force of 23.4k, broadly in line with the fall in employment. However, the broader underemployment rate increased from 5.8% to 6.2% on a flat month for hours worked. That saw total labour force underutilisation lift 0.4ppt to 10.5%, a rise consistent with the weak employment figure and an overall loosening of conditions in November.  

As highlighted, hours worked stalled in November (0%) to ease from a modest rise in October (0.4%). That slowed the annual run-rate in hours worked from 2.1% to 1.2%. Over the past year, hours worked in the part-time segment at 4.5% have significantly outpaced the growth seen in the full-time segment (0.6%).    

Macro (Re)view (16/1) | Mind the noise

A range of crosscurrents from geopolitical risks, policy uncertainty and fears over Fed independence continued a noisy start to the year. US bank earnings were mixed but the key driver of sector weakness was proposed caps on credit card interest rates, while ongoing valuation concerns weighed on US equity markets. In the FX space, likely snap elections in Japan are driving a weaker Yen on the view that an increased majority for the governing LDP could lead to more supportive fiscal and monetary settings. At around 158 USDJPY is pressing highs since 2024, fueling speculation over possible currency intervention.  

Expectations for two Fed rate cuts remained intact this week, priced for June and September. Fears of renewed inflationary pressures were allayed as US CPI remained steady in November, matching consensus at 2.7%yr on a headline basis while core inflation held at 2.6%yr against an expected lift to 2.7%. Those rates were slightly below producer price inflation that rose to 3%yr in headline and core terms, above the 2.7% consensus for both measures. 

Putting all this together, estimates are for the core PCE deflator - the gauge the Fed sets policy to - to be in the order of 3%yr, which is still elevated to the 2% target but expected by the Fed to decline as the year progresses. The clear risk to that view is if firms look to pass through more of the tariff-driven increases to their input costs to the consumer, but so far firms are using profit margins to absorb a good degree of those higher prices. On the consumer, November retail sales that aligned with Black Friday were solid rising by an above-consensus 0.6% month-on-month while the control group lifted 0.4% month-on-month.    

Money markets in the UK continue to price a further two cuts from the Bank of England this year. Positions in UK assets come up against event risk next week with the December inflation report due. Despite a soft start to the year, Sterling is up around 1.6% against the USD as markets removed the risk premium built in during the run up to the Autumn budget. Strong inflation data could see that momentum continue if BoE easing bets are pared back. Meanwhile, pricing has been unchanged so far in 2026 for the ECB to remain on hold through the year.  

Pessimism around the economic outlook and finances in the year ahead may pose risks to the acceleration in spending by Australian household seen in late 2025 continuing. Black Friday sales and major events drove household spending to a 1% month-on-month rise in November (see here), adding to the 1.4% surge in October - its fastest gain since early 2024. Strong momentum in discretionary spending has been the key, a sign that lower inflation and RBA rate cuts help to free up households to spend at the sales and as the major sporting events (NRL and AFL finals and Spring racing carnival) and concerts came around. 

Since then, the RBA at its December meeting indicated further cuts were unlikely with upside risks to inflation increasing. Although markets price potential RBA tightening as a story for the second half of the year, households may be wary. Consumer sentiment declined by 1.7% in January according to the Westpac-Melbourne Institute Index as views around the outlook for household finances (-4.5%) and economic conditions (-6.5%) deteriorated. That said, the index has fallen in four of the past five months, with spending still accelerating through October-November. December's labour force report is due next week where a slight uptick in the unemployment rate to 4.4% is expected. Job vacancies this week were consistent with a steady labour market as vacancy levels were broadly flat over the reporting period to November (-0.2%).

Australian household spending rises 1% in November

Black Friday sales and a busy calendar of sporting events and concerts saw Australian household spending rise 1% month-on-month in November. This comfortably outpaced expectations (0.6%) and followed October's 1.4% acceleration - the fastest increase since the start of 2024. Household spending has risen for 14 months on end and annual growth has worked its way up to its fastest pace in more than 2 years at 6.3%. Market pricing attaches a low probability to the RBA raising rates upon its return in February, with last week's November CPI report indicating that upside risks to the RBA's inflation outlook were well contained in the final quarter of 2025.   

Gains of 1.4% in October and now 1% in November show there was an acceleration in household spending towards year-end - though December could see a slowing. Discretionary categories have led the way with gains of 1.7% in the prior month and then 1.2% in November. The widening footprint of Black Friday where retailers are starting discounting periods earlier and major events have been key drivers. Meanwhile, the three RBA rate cuts in 2025 and higher real income growth are probably also at play. Annual growth in discretionary spending is now tracking at a 2½-year high at 6.1%.  

In November, sporting events including the Spring racing carnival and many high-profile concerts supported services spending (1.2%) while goods spending (0.9%) rose on Black Friday. These outturns saw annual growth in service spending rise from 6.5% to 7.8% - its fastest pace in almost 2 years - though goods spending was little changed at 4.9%.    

Spending in November rose in all except for one of the nine categories tracked by the ABS, with alcoholic beverages and tobacco falling by 1.8%. Gains in the other eight categories were led by a 2.2% increase in furnishings and household equipment and by a 2% lift in clothing and footwear, both benefitting from Black Friday. 

Recreation and culture rose by 1.7% to be up by 8.6% over the year - its fastest annual pace in 2½ years. The Spring racing carnival in Melbourne and a number of major concert tours during November were key contributors. This generated associated spending at hotels, restaurants and cafes (1.2%) and transport (1%).   

Australia's trade surplus $2.9bn in November

Australia's trade surplus narrowed to $2.9bn in November from $4.4bn in October, defying expectations to widen to $5bn. Export revenue declined for the first time since August with a 2.9% fall as iron ore saw its weakest month in 4 years (-9.1%). Import spending held broadly flat in the month (0.2%) at record highs.  

November's trade surplus was $2.9bn - its narrowest since August - after outcomes of $4.4bn in October and $3.4bn in September. In the 11 months to November, the trade surplus has averaged $3.9bn, which compares to averages of $5.6bn in 2024, $10.4bn in 2023 and the highwater mark of $13.5bn in 2022. The chart below shows the key dynamic behind narrowing trade surpluses over the past few years has been declining export revenue as import spending has grinded higher.

Exports declined by 2.9% in November ($44.6bn) on the back of falls in non-rural goods (-4.5%) and non-monetary gold (-7.8%). Weakness in non-rural goods mainly reflected a 9.1% decline in metal ores and minerals (iron ore), its largest fall in 4 years. ABS data indicated this was largely driven by weakness in export quantities, though prices were also soft. Non-monetary gold weakened in November (-7.8%) but remained near record highs.   

Import spending edged slightly higher (0.2%) to a new record high at $41.6bn, the level up 12.8% since November 2024. While there were declines in consumption goods (-1.9%) and capital goods (-2.8%) that was offset by a 5.3% rise in intermediate goods. Industrial supplies were the key driver behind the lift in intermediate goods, with rises in processed (14.8%) and primary supplies (117%). 

 

Australian dwelling approvals surge 15.2% in November

Australian dwelling approvals posted their fastest rise in 2½ years surging by 15.2% in November. The key driver was the volatile higher-density segment that saw a 36.3% increase in approvals in the month, while house approvals were up by a modest 0.7%. These outcomes elevated total approvals to their highest since February 2022 coming in at 18.4k in November. RBA rate cuts - 75bps in total in 2025 - rising housing prices and a tight overall supply-demand balance have all likely helped lift approvals, but levels still remain below those seen in past cycles.      

Monthly dwelling approvals rose 15.2% in November to 18.4k. This continues a volatile profile over recent months, often swinging from large gains to declines. The November result follows a 6.1% fall in October, an 11.4% rise in September and declines of 3.7% in August and 10.3% in July. Overall, approvals have averaged out at 17.1k over the 3 months to November - a highwater mark on that basis going back to late 2021. The chart below shows the higher-density segment has driven the recent momentum in approvals. 

 

The high-rise segment in particular looks to be the main driver of the upturn in higher-density approvals. That strength has been evident across a number of capital cities including Sydney, Melbourne and Brisbane. 

Australian CPI 3.4% in November

An improved Australian inflation report in November saw both annual headline and core CPI ease after rising in the prior month. Headline CPI slowed from 3.8% to 3.4%, printing below the 3.6% consensus figure, while trimmed mean or core CPI softened from 3.3% to 3.2%, as expected. Black Friday sales and holiday travel were key contributors to the softer inflation outcomes. The upside risks the RBA has been wary of in the final quarter of 2025 in light of its year-end forecasts for headline CPI of 3.3% and 3.2% for the trimmed mean do not appear to be materialising. The RBA's next rates decision is set for February 3, a meeting at which markets see the odds of a rate hike as unlikely at around a 1 in 3 chance. 

Source: ABS 

For the second month in succession, the monthly change in headline CPI was 0%. In October, base effects lifted the annual rate from 3.6% to 3.8% (headline CPI was -0.2% in October 2024), but in November they drove a decline from 3.8% to 3.4%, after the 0.4% rise from 12 months earlier fell out of the calculation. This highlights the volatility in the monthly indicator and how judgments can swing. The RBA has therefore said its focus remains on the quarterly figures that are due later this month. The more stable trimmed mean came in at 0.3% month-on-month, also the same as in October to leave the annual pace running a little above the top of the 2-3% target band. 

The key insights in today's report were around the effect of the Black Friday sales. Compared to 2024, clothing garments saw a larger discounting effect in 2025 with prices falling by 2.3% in the month (vs 1% in 2024). This was also the case for footwear and furniture, those items down 5.5% and 4.6% respectively in November 2025 to outpace the falls seen in 2024. Accessories were the outlier with prices down by a smaller amount in the 2025 sales (-4.1%) compared to 2024 (-7%). 

The other main driver weighing on headline inflation in November was holiday travel. That came after strong demand during September and October associated with the AFL and NRL finals and school holidays. 

Source: ABS 

Macro (Re)view (19/12) | Central bank divergence in focus

Markets navigated a week heavy with event risk with relative calm. US and European equities lifted but Asia underpeformed. The USD found support despite soft data reaffirming expectations for further Fed rate cuts. An easing Fed sets up central bank divergence as one of the key themes as markets look ahead to 2026. This week, the Bank of England cut by 25bps but the Bank of Japan hiked by 25bps. The ECB held steady as it continued to indicate rates had floored for the cycle, and the Riksbank and Norges Bank were also unchanged. Domestically, speculation is starting to increase around the RBA hiking as early as the February meeting. 

US data slowly coming back online is supporting dovish pricing for two Fed rate cuts next year, with the labour market weakening and inflation slowing. Headline CPI eased from 3% to 2.7%yr, defying the 3.1% consensus while the core rate came in from 3% to 2.6%yr against expectations for no change. Cooling inflation reaffirms the Fed's focus on the employment side of its dual mandate, which showed renewed signs of weakness.    

November payrolls rose by 64k but only after estimates reported a 105k fall in October. There were also 33k of downward revisions to payrolls in August (-26k) and September (108k). Given the Fed's view that the data are overstating payrolls by some 60k per month, all indications are that employment has been weakening into year-end. 

The unemployment rate rose to 4.6% in November from 4.4% in September (no figure was posted for October), while the underemployment rate jumped from 8% to 8.7% - both measures touching highs back to 2021. That came as participation picked up to 62.5% and the prime age rate held at 83.7% - just 0.2ppt off cycle highs. 

A widely expected hold from the ECB and upgrades to the growth and inflation outlook reaffirmed the pre-meeting view in markets that the easing cycle has likely run its course. The key depo rate was left at 2%, unchanged since June after 8 cuts from mid-2024 halved it from a peak of 4%. Swaps pricing has rates remaining on hold well into next year, the most likely scenario according to a Reuters article quoting ECB sources - though further easing has not been ruled out amid an uncertain economic outlook. 

At the post-meeting press conference, ECB President Lagarde continued to describe policy settings as being 'in a good place', reflective of new forecasts that showed inflation is on track to stabilise around its 2% target. While the ECB lifted its inflation forecasts for 2026 to 1.9% in headline terms (from 1.7%) and 2.2% on an underlying basis (from 1.9%), it expects inflation to ease back in 2027 to 1.8% headline (from 1.9%) and 1.9% core (from 1.8%).

The uplift to the inflation outlook comes as the euro area economy has remained resilient to trade and geopolitical headlines, underpinned by services-led growth. Accordingly, the ECB also revamped the expected growth profile to 1.4% this year (from 1.2%), 1.2% in 2026 (from 1%) and 1.4% in 2027 (from 1.3%). President Lagarde also highlighted the effect of the labour market in supporting the economy, with the unemployment rate sitting near record lows.

In the UK, the BoE lowered rates by 25bps to 3.75%. The decision was clinched on a narrow 5-4 majority by the Monetary Policy Committee, after Governor Bailey switched his vote to support a cut. This was the 6th cut in the current easing cycle dating back to August last year. The statement maintained the guidance that rates were 'likely to continue on a gradual downward path' - though it went on to note in a new inclusion that 'judgements around further policy easing will become a closer call'. 

In his policy comments in the meeting minutes, Governor Bailey said there was 'scope' to cut further but there was now 'more limited space' to do so with rates closer to neutral. The overall tone of the meeting saw markets wind back pricing for further easing to around 1-2 rate cuts by May next year. Earlier in the week, 2-3 rate cuts were seen as likely after inflation data in November showed encouraging progress - headline CPI fell from 3.5% to 3.2%yr and core CPI slowed from 3.4% to 3.2%yr - while there were more signs of weakness in the labour market as employment continued to slide (-38k in November).

The Australian government released the mid-year update of its 2026/26 budget. MYEFO reported a slight reduction in forecast cumulative deficits to $143.2bn by 2028/29, down from earlier estimates of around $152bn. The improvement came on the back of significant revenue upgrades, but structural pressures and policy choices mean spending is set to continue rising. The AOFM revised its issuance target to $125bn for the current fiscal year ($62.5bn already complete), down from $150bn previously. My review of MYEFO here has more analysis. 

That brings Macro View to a close for the year. Merry Christmas and best wishes.