Macro (Re)View (3/4) | Sentiment rebounds

Equities were in a more buoyant mood this week amid optimism that the US and Iran were negotiating an off-ramp to the Middle East conflict. However, President Trump's address dashed hopes of any near-term shift, pushing front-month crude to fresh highs by the weekend at $112/bbl. Still, risk sentiment held up, sending the USD softer across the major pairs, while bond yields declined.  

US nonfarm payrolls rose by 178k in March, rebounding strongly above consensus (65k) after adverse weather and industrial action drove a 133k decline in February. The unemployment rate fell from 4.4% to 4.3%, though participation (61.9%) was down slightly on the prior month. Meanwhile, the wage component showed no concerns for inflation, easing to 3.5% yr from 3.8%. The report came on the back of other data points that were consistent with strength in the US economy ahead of the conflict. Retail sales lifted 0.6%m/m in February (0.5% expected) and the control group - a better gauge of the underlying strength in spending - rose by 0.5%m/m (vs 0.3%). The ISM manufacturing index rose to 52.7 in March, indicating activity in the sector was expanding at its fastest pace since mid-2022; however, the prices paid sub index accelerated (+7.8) reflecting the impact of surging oil prices.       

Euro area inflation surprised slightly to the downside in March, with the full effects from the energy shock yet to show. Headline inflation rose to 2.5%yr (vs 2.7% expected) from 1.9% in February, while the core rate eased to 2.3%yr against consensus for an unchanged 2.4% pace. ECB officials over the past week left the door open to raising rates but emphasised the duration of the shock and its second-round effects on prices and wages were key factors. A longer and more sustained shock would start to shift the outlook towards the more adverse scenarios the ECB outlined in its recent macroeconomic projections. 

Locally, the RBA's March meeting minutes shed further light on the internal hike-hold debate, revealing more division among members than initially appeared. A narrow 5-4 majority delivered a 25bps rate hike to 4.1%, while Governor Bullock later said all members supported the need for tighter policy - the only disagreement was on timing. However, the minutes outlined the key differences between the hike and hold camps. 

The more hawkish majority landed on raising rates due to the conflict adding to existing inflationary pressures, with policy viewed as not adequately restrictive. While acknowledging increased economic uncertainty and the possibility of slower-than-expected growth, their view was that weaker demand (if it eventuated) would help return inflation to target faster. By contrast, the less hawkish minority took a more cautious view, preferring to wait for greater clarity over the impacts of the energy shock. They also contested the assessment that the economy was operating with excess demand, highlighting inconsistencies in the consumption and labour market data.

Data this week indicated that the labour market was robust, with job vacancies rising by 2.7% for the 3 months to February, remaining a little above a 2% as a share of the labour force. Dwelling approvals surged almost 30% in February, though that appeared to be driven by approvals in the higher-density segment being held over during the summer holiday period (see here). The goods trade surplus widened sharply to $5.7bn in February, driven by surging safe-haven demand for gold exports (see here).  

Australia's trade surplus widens to $5.7bn in February

Record high non-monetary gold exports widened Australia's trade surplus to a 7-month high of $5.7bn in February. This was more than double January's surplus of $2.3bn (revised from $2.6bn) and well above expectations to print at $2.9bn. Nearly $8bn of non-monetary gold was exported in February, driving a 4.9% rise in total exports for the month. This occurred alongside a 3.2% fall in imports - its largest decline in almost 2 years - leading to the wider trade surplus. 

February's trade figures reported a $3.4bn widening in the trade surplus to $5.7bn, its highest since July last year. This latest result saw the 3-month average rise from $2.7bn to $3.8bn. In very volatile times for global trade, there have been opposing views around what this means for Australia, which has played out in the local dollar. The AUDUSD rose initially in response to the escalation of conflict in the Middle East and the subsequent closure of the Strait of Hormuz. This reflected expectations that surging oil and energy prices more broadly would boost Australia's terms of trade. However, this has since reversed with concerns over global growth ramping up - a headwind to the risk-sensitive AUD.  

MarketWatch chart 

Monthly exports rose by 4.9% in February to $45.6bn (8.9%yr). This came despite non-rural goods, a category dominated by the major resources (iron ore, coal and LNG), falling by 1.9%. As alluded to earlier, non-monetary gold exports were the major mover surging by 29.9% in the month to a new record high just below $8bn - effectively doubling over the past year on safe-haven demand. Rural goods were another key support lifting by 13.9% month-on-month (strongest rise since November 2024), following large increases across meat (26.8%), wool (13.1%) and other rural products (15.5%).  

Imports weakened by 3.2% in February to roll back to around $40bn, a level last seen during the middle of last year. By contrast to exports, non-monetary gold imports fell away (-41.3%) from earlier increases. Capital goods dropped by around 8% in the month, but over the past year the category has been strongly supported by equipment to fit out data centres. Meanwhile, consumption goods rose by 3.4%, broadly reflecting the strength in consumer demand the RBA has sought to cool by hiking rates in February and March. Following falls of more than 3% in the prior two months, intermediate goods rebounded with a 3.1% rise in February.  

Within intermediate goods, imports of fuels and lubricants fell 8.6% in the month to be down by 9.6% across the year. This is now clearly heading higher from March. For reference, fuel imports pressed highs of $6.5bn following the Ukraine war in 2022, with their current level in February being $3.7bn.  

Australian dwelling approvals surge in February

Australian dwelling approvals surged in February to their highest level since mid-2021, rebounding sharply from large declines around the turn of the year. Headline approvals jumped almost 30% month-on-month, following falls of 14.2% in December and 7.2% in January - nearly five times the expected rise of 6.2%. An inflow of unit approvals, notably in Victoria, was the key driver of today's outcome, with many approvals likely to have been held over from the summer holiday period. House approvals were broadly flat. Approvals lifted through 2025 helped by the RBA's easing cycle, but with that now reversing to a hiking cycle this momentum faces headwinds.

    

 

National dwelling approvals jumped by 29.7% in February, their largest month-on-month rise in 4 years to reach their highest level (19,022) since August 2021. By category, the volatile unit or higher-density segment (9,071) surged by around 94%, boosted by a huge volume of approvals from Victoria (429%) that were likely backlogged from the preceding months. House or detached approvals (9,951) - a much more stable category - were essentially unchanged (-0.2%).  

Across the past 3 months, headline approvals have averaged 16,500, with house approvals having gradually trended up to 9,900 - their highest since August 2022. The 3-month average for unit approvals is 6,600, around the middle of its range from the past year or so.   

The underlying detail showed broad increases across the range of higher-density approvals, with high-rise and townhouses the main contributors. 

As highlighted earlier, Victoria was the key driver where higher-density approvals rose well in excess of 400%. In the Victorian capital, unit approvals climbed to their highest level in 12 months. Unit approvals also increased very sharply in Western Australia (163%) and Queensland (102%).   

Macro (Re)View (27/3) | Timeline pressure builds on Hormuz reopening

Markets were left to weigh the daylight that exists between the US and Iran, leaving the Strait of Hormuz under its existing chokehold. With the conflict about to enter its 5th week, Trump's initial 4-6 week timeline is coming into focus - the White House maintaining the operation is ahead of Schedule as Iran put forward demands of its own. Brent crude dipped below $100/bbl this week on hopes for a ceasefire, but negotiations remain a long way from delivering that outcome - let alone reopening the Strait. US equities remained under pressure, while weak Treasury auctions put upward pressure on yields. Ongoing uncertainty has returned a safe-haven bid to the USD, weighing on the local AUD.  

In Australia, a speech from Assistant Governor Kent reinforcing the RBA's hawkish stance to the energy shock kept pricing for two further rate hikes this year supported. Meanwhile, markets effectively consigned some encouraging signs on inflation on the eve of the conflict to the history books. Speaking to an audience of market participants, Kent said the economic conditions and upturn in inflation since September last year had indicated that financial conditions were less restrictive than previously thought, necessitating the rate hikes in February and March. 

The conflict was framed by Kent as a supply shock that added additional risks to the inflation outlook and to inflation expectations the longer it persisted. The tone was very much reflective of the hawkish majority on the Monetary Policy Board following last week's split (5-4) decision. February's inflation data surprised to the downside as headline CPI eased unexpectedly from 3.8% to 3.7%yr while the trimmed mean or core rate held at 3.3%yr (reviewed here). Declining petrol prices ahead of the conflict were taking some heat out of the CPI basket, while underlying prices were at least stabilising.   

At the ECB Watchers Conference, President Lagarde said the current dynamics were different to the energy shock following in the Ukraine war in 2022: so far, the energy price surge was much less severe, demand conditions were currently weaker, and monetary and fiscal policy were now more neutral rather than stimulatory. Additionally, inflation has been around the ECB's target over the past year. Overall, Lagarde indicated the ECB will adopt a measured approach, but that tighter policy could be an option if inflation became expected to deviate 'significantly and persistently from target'.  

Market pricing in the UK remained strongly hawkish, implying 3 rate hikes this year. That reflects comments from BoE Chief Economist Pill that the uncertainty brought about by the shock was not a reason for policy inaction. Comments from other BoE members were more nuanced. Policy hawk Greene said there were greater downside risks to the economy in hiking now than in the previous tightening cycle in 2022, while the dovish member Taylor called for holding rates steady until greater clarity over the economic effects from the energy shock became evident.

Australian CPI 3.7% in February

Australian inflation softened slightly on the eve of the energy price shock coming in below expectations in February. Headline CPI was flat (0%) month-on-month, down from 0.4% in January, slowing the annual rate from 3.8% to 3.7% (vs 3.8% expected). In underlying terms, inflation remained above the top of the RBA target band (2-3%) with the trimmed mean measure (0.2%m/m) holding at 3.3%yr. Markets put the odds of a third consecutive 25bps rate hike in May at 67%. 

Headline inflation slowed in February to 0%m/m from 0.4%m/m in January, softening the annual pace from 3.8% to 3.7%. Ironically, petrol prices (-3.4%) were a key factor behind this - but this was prior to the escalation of the Middle East conflict - while domestic travel (-7.4%) post the summer holidays also played a role. 

Fuel prices had fallen significantly by around 7% over the year to February, making the current surge feel even more acute. Prices in February were down 3.4% after a 3.2% decline in January, with the last instance of back-to-back monthly falls of 3% coming in August (-3.1%) and September (-3.9%) of 2024. Alongside surging fuel prices, households are also facing significantly higher costs for electricity with government rebates rolling off. Across the past 12 months, electricity costs have risen 37%.  

Excluding the effects of volatile price changes, core inflation (measured by the trimmed mean) was broadly steady in February. The monthly rate was 0.2% and the annual pace was 3.3%, unchanged for the third month running. Overall, the momentum in core inflation is running above the target band (the RBA is required to hit the midpoint), with the 3-month annualised pace at 3.2%. Core inflation reflects more of the price pressures being generated by strong household demand, which the RBA in raising rates last week said it needed to temper. 

Macro (Re)view (20/3) | Hawkish shift validated

This was always going to be a pivotal week with as many as eight major global central banks meeting amid an unfolding energy crisis posing upside risks to inflation and downside risks to growth. The hawkish repricing that defined the week or so leading into these meetings was unequivocally seen as validated, even as the central banks broadly communicated a cautious approach into the uncertainty. The RBA established itself as the most hawkish among the major central banks by hiking rates; however, that had little effect on the global repricing where the BoE and to a lesser extent the ECB were the catalysts - markets now pricing up to three hikes by year-end from both institutions. 

Starting in Australia, the RBA's 25bps rate hike to 4.1% (reviewed here) stood as the most hawkish move of the week among the raft of central bank meetings. My contrarian view for the RBA to hold amid elevated global uncertainty missed the mark but nailed the nuance, with the Board split 5-4 (the minority voting to hold), prompting an initial 'dovish' reaction as markets scaled back pricing for additional tightening. The global hawkish repricing, however, now has another hike in May expected by markets. The RBA's justification for hiking was that data on economic growth in Q4 (0.8%q/q, 2.6%Y/Y) and the labour market had convinced the policy board that capacity pressures were greater than previously thought, with higher energy prices now adding to upside inflation risks. Although the unemployment rate rose from 4.1% to 4.3% in February's report released after the meeting (reviewed here), it is unlikely to have changed the RBA's view.          

In the US, the Fed held rates steady in the 3.5-3.75% range, while updated forecasts from the FOMC maintained the projection for a rate cut by year-end. Markets are less convinced, anticipating that as energy prices inevitably push up inflation the Fed will hold rates, if not start to think about hiking. At this stage the inflation outlook was revised up modestly to 2.7% for both headline (from 2.4% previously) and core inflation (from 2.5%); however, the growth forecasts were little changed, with this year's projection actually firming to 2.4% (from 2.3%). The key message from Chair Powell at the post-meeting press conference was that with longer-term inflation expectations remaining consistent with the 2% target the FOMC was minded to monitor rather than respond to developments from the Middle East. 

A unanimous vote from the Bank of England to hold Bank Rate at 3.75% swung a previously split MPC open to further rate cuts in a hawkish direction. The increased inflationary risk from the energy price shock brought all nine members into alignment for the first time since September 2021, with the MPC's previous guidance that 'Bank rate is likely to be reduced further' falling by the wayside in the decision statement. Markets reacted sharply pricing in three rate hikes by year-end, compared to around a 50% chance of just one hike ahead of the meeting. 

The meeting minutes contained the nuance in the discussions held by the MPC. A range of alternative paths for rates were possible depending on the duration of the conflict. The longer it persisted, the MPC felt the greater the chance that higher energy prices would spark second-round effects in wages and prices, requiring rates to become more restrictive. However, if it proved to be a more short-lived shock, a less restrictive stance would be the more likely course amid weakness in the UK economy and labour market. 

At the ECB, all key rates remained unchanged (depo rate 2%) as the Governing Council noted the outlook had been made 'significantly more uncertain' by the conflict. The statement and press conference from President Lagarde broadly communicated a wait-and-see stance; however, post-meeting reporting quoting ECB sources indicated a willingness to discuss hiking rates in April (priced at around a 60% chance) ahead of a potential move at the June meeting. Two to three rate hikes are priced in by year-end.     

New forecasts compiled by ECB staff showed an expected hit to growth this year of 0.3ppt to 0.9% in a 'baseline' projection - though growth could potentially slow more sharply to 0.4-0.6% under scenarios where the conflict is more severe and causes greater disruptions. Meanwhile, the ECB's inflation projections have ramped to 2.6% on a headline basis this year (from 1.9% in December) and 2.3% for the core rate (from 2.2%). Again, however, alternative scenarios have modeled headline inflation rising to as high as 4.4% this year.   

Australian employment 48.9k in February; unemployment rate 4.3%

Australia's unemployment rate rose unexpectedly from 4.1% to 4.3% in February, even as employment increased sharply by almost 50k - well above the 20k consensus - as labour supply rebounded from recent softness. The RBA hiked the cash rate by 25bps for the second meeting in succession on Tuesday, highlighting a tight labour market and broader capacity pressures as key factors in its decision. Although the unemployment rate rose, it is still tracking below the RBA's estimate for an increase to 4.3% by the middle of the year. 

By the numbers | February

• Employment rose by a net 48.9k in February, outperforming the 20k consensus. Revisions added 3.8k to employment over the past two months: January was revised up to 26.1k (+8.3k) but December was revised down to 64k (-4.5k).    
• Unemployment rose to 4.3% against expectations to remain at 4.1%; however, the broader underemployment rate was steady at 5.9%. Underutilisation - the measure that combines the two - rose from 10% to 10.1%.  
• Labour force participation increased from 66.7% to 66.9%, a 4-month high. The Employment to population ratio (share of people in work) remained at 64%.  
• Hours worked declined by 0.2% in the month after a stronger-than-usual 0.6% rise in January. Annual growth was steady at 1.6%. 

The details | February

Employment rose by 48.9k in February, more than double the consensus forecast of 20k while also exceeding the top side of expectations (10-40k). Whereas in January full time employment led the way over the part time segment (FT 54.6k/PT -28.5k), this flipped in February: part time employment increased by 79.4k with full time declining by 30.5k. 

Although volatility around the monthly composition has been elevated, momentum in employment growth overall has accelerated noticeably. Employment gains over the past 3 months have lifted to an average of 46.3k, the strongest pace in around 2½ years going by this measure. 

Despite the strong employment rise, the unemployment rate still increased from 4.1% to 4.3% to reach its highest since November last year. This was due to an uptick in the participation rate from 66.7% to 66.9%, adding 83.9k to the labour force, outpacing the rise in employment (48.9k). Nonetheless, the recent dynamics have been employment growth has picked up while participation has been trending lower. This has helped keep the unemployment rate from lifting as the RBA has expected it to, but on the other hand this has also played a role in the central bank seeing the need to deliver back-to-back hikes with the likelihood of additional tightening.  

 

Hours worked were down for the month in February by 0.2% and up 1.6% over the year. This followed a strong result in January (0.6%m/m), with the ABS attributing that outcome to a larger-than-usual number of people working through the peak summer holiday period. 

In summary | February 

Today's report is a case of choose your own narrative - more likely it will probably only be used to strengthen existing views. My takeaway is that employment growth has picked up - there's enough evidence to come to that conclusion - but the unemployment rate is still at risk of rising. That's if participation, which trended down last year, begins to bounce back up again.

Preview: Labour Force Survey — February

Australia's Labour Force Survey for February is due today at 1130 AEDT. Robust labour market conditions were a key factor in the RBA's decision to hike rates on Tuesday for the second meeting in succession. Another solid print is expected today, with the unemployment rate forecast to hold at 4.1%. 

February preview: Steady as it goes

Markets go into today's report with the line set at a 20k expected increase in employment, after a 17.8k rise last time out. Monthly employment outcomes have been highly volatile over the past year or so (green line in chart below), and this is reflected in the wide range of estimates from 10k on the low side to around 40k top side. Based on a 20k rise in employment and an unchanged participation rate (66.7%), markets forecast the unemployment rate to remain at 4.1% (range: 4-4.2%).   

January recap: Unemployment rate holds at multi-month lows 

The national unemployment rate remained at 4.1% at the start of the year, defying an expected increase to 4.2%. With the participation rate also unchanged at 66.7%, a relatively modest rise in employment of 17.8k was sufficient to keep unemployment steady, in line with its lows from the first half of 2025. Unemployment had only a few months earlier climbed as high as 4.3%.

Employment surged by 68.5k in December, its strongest rise in 8 months, so while the increase in January was much more modest, it was still a respectable outcome - especially as it was driven by the full-time segment (50.5k). The weakness was in part-time employment (-32.7k), though caution is warranted due to seasonal effects amid the peak summer holiday period. 

On the topic of summer holidays, hours worked surprised with a 0.6% rise in the month to be up by 1.6% over the year. The ABS attributed the increase to fewer workers than usual taking annual leave this January than has historically been the case.