Macro (Re)view (20/2) | More questions than answers

Equities advanced this week with much of Asia on holidays, the USD strengthened, while data and Fed communications saw the Treasury curve bear flatten. There is an uncertain path forward in the week ahead as to how the Trump Administration will respond to the Supreme Court invalidating its trade tariffs imposed under the IEEPA legislation. Markets always sensed this could be the case, but there are alternative avenues the Administration could take to impose tariffs. That reaction becomes the key event for markets next week amid a light macro calendar.

Robust Australian labour market conditions were reaffirmed in this week's data, solidifying expectations for further RBA tightening. Markets price the next 25bps hike by August - though the risks skew towards an earlier move. The minutes of the RBA's February meeting outlined that the Board was compelled to hike after concluding the recent acceleration in inflation above the 2-3% target band was likely to prove persistent, reflecting capacity pressures from strong demand and a tight labour market. 

In January, employment increased by a respectable 17.8k (20k expected) following the 68.5k surge in the prior month (reviewed here). That was sufficient to keep the unemployment rate at 4.1% - defying expectations to lift to 4.2% - as the participation rate held at 66.7%. The RBA had expected the labour market to ease over the back half of last year, but conditions remained resilient - and if anything, actually tightened slightly. That backdrop saw wages growth maintaining a decent pace in the December quarter (0.8%) and holding at a 3.4% annual rate (reviewed here). 

Key US inflation data surprised modestly to the upside as the January meeting FOMC minutes introduced more two-way risk to the rates outlook. The core PCE deflator - the inflation gauge the FOMC sets policy to - firmed more than expected rising from 2.8% to 3%yr in December, its fastest in 10 months. While further rate cuts this year remain the baseline outlook for both markets (50bps of easing priced in) and the FOMC itself (25bps according to the dot plot), the January meeting minutes noted 'several participants' were open to adjusting its policy guidance if inflation was to continue to run above its 2% target.    

A manufacturing-led revival lifted euro area economic activity to its fastest pace in 3 months according to the February Composite PMI (51.9). However, cost pressures showed signs of rising and firms were cautious on employment. But the main story was in the manufacturing sector, which saw its first expansion in activity since the middle of 2022 and the first increase in order books since August last year. 

In the UK, data showed inflation slowed and the labour market weakened - both factors supporting pricing for a BoE rate cut in March, and likely more beyond that. Headline CPI declined from 3.4% to 3%yr in January (as expected), albeit driven by a range of temporary factors (airfares, fuel and private school fees). Removing those and other factors, the core rate eased more modestly from 3.2% to 3.1%yr (3% expected), underpinned by stickier services inflation (4.4%yr). But markets were more concerned by a rise in UK unemployment from 5.1% to 5.2% in December (5.1% expected). With the labour market easing, wage pressures continued to cool. Average weekly earnings growth fell to a 4.2%yr pace - a near 4-year low. 

Australian employment 17.8k in January; unemployment rate 4.1%

Australia's unemployment rate held at 4.1% in January, defying expectations to rise to 4.2% early in the new year. Employment continued to rise posting a respectable increase of around 18k, after it surged by around 69k as 2025 wound down. Although markets reacted hawkishly to today's report, little has really changed: the labour market is solid and generating wages growth in the mid 3s (see yesterday's report). Further RBA tightening looks likely, but the inflation data holds the key to the timing.    

By the numbers | January

• Employment lifted by a net 17.8k in January (full time +50.5k/part time -32.7k), moderating broadly in line with expectations (20k) from December's 68.5k rise.  
• Headline unemployment was unchanged at 4.1%. It was expected to tick up to 4.2%. However, both the underemployment rate and total underutilisation increased by 0.2ppt to 5.9% and 10% respectively.
• Labour force participation remained at 66.7%, though the employment to population ratio declined to 63.9% from 64%.    
• Hours worked rose by 0.6% month-on-month (1.6%yr), its strongest January outturn since 2023. 

The details | January

Australia's Labour Force Survey can often be volatile - especially during the peak summer holiday period. But today's report produced few fireworks. Overall, labour market conditions look to have remained solid early in the new year. Employment lifted by 17.8k on net: 50.5k people were added to full time employment as part time employment declined by 32.7k, nearly matching the expected 20k increase. That was a decent outcome given employment surged by 68.5k in December, its strongest outcome in 8 months.  

The key statistic markets zeroed in on was the unemployment rate holding at 4.1%, an upside surprise on expectations to soften to 4.2%. Through the back half of last year, the unemployment rate averaged 4.3% - so consecutive months now at 4.1% suggests the labour market has retightened a little; however, in January, the broader underemployment rate increased from 5.7% to 5.9%, which took total labour force underutilisation back to double digits (10%) after briefly dipping to its lowest since April 2023 in December (9.8%). 

Labour supply is off cycle highs having peaked in early 2025. The participation rate stood at an unchanged 66.7% in January, in line with its 3-month average; however, that compares to an average of 67.1% 12 months prior. Meanwhile, the employment to population ratio - the share of working aged Australians in work - was just below 64% in January, 0.5ppt down from record highs at the start of 2025. 

Hours worked rose by 0.6% in January following the 0.4% rise in the final month of last year. That was the strongest increase in hours for a January since 2023, with the ABS reporting that fewer people were taking annual leave at the start of the year. Annual growth in hours worked lifted from 1% to 1.6%. The part time segment had been leading the full time segment in terms of annual growth in hours worked, but base effects swung that narrative entirely. Growth in full time hours lifted from 0.8% to 2% as the part time segment swung from 2.1% to -0.2%.    

In summary | January

Today's report - specifically the upside surprise on the unemployment rate that came in lower than expected - drew a hawkish reaction as markets adjusted the probabilities for an earlier rate hike than the increase pencilled in for the August meeting. Given the RBA's inflation concerns, August does seem to be fairly distant timeline for a follow-up hike to its increase earlier this month. The most likely scenario in my view is the RBA waits for the next quarterly CPI report (29 April), putting the May meeting (4 and 5 May) on the table for a rate hike - if inflationary pressures have not abated sufficiently through the opening quarter of the year. 

Preview: Labour Force Survey — January

Australia's Labour Force Survey for January is on the docket today, due at 1130 AEDT. A strong report last time out saw the national unemployment rate fall to a 7-month low of 4.1% as employment surged by over 65k. Signs of renewed tightness in the labour market was a key factor in the RBA going on to hike rates by 25bps earlier this month. Markets are pricing in a further hike in the cash rate to 4.1%, but not until August. There were few surprises yesterday as wages growth matched market and RBA forecasts at 0.8% in the December quarter and 3.4% in annual terms. But the Labour Force Survey can often deliver the unexpected, especially during the peak summer holiday period.

January preview: Modest start to 2026 expected 

Expectations are set modestly for today's report. Employment is forecast to moderate back to a 20k rise in January (range: -5 to 40k) after a very strong increase of 65.2k in December. As a result, the unemployment rate is anticipated to ease from 4.1% to 4.2% (range: 4.1 to 4.3%). 

December recap: Strong close to year-end  

Employment rebounded with its strongest increase in 8 months rising by 65.2k in December - much of it full time (54.8k) - after declining by 28.7k in November. This far exceeded expectations for a 27k rise. Employment rose by 73.8k across the final quarter of the year, lifting from just a 29.2k increase in the prior quarter.

That renewed strength in employment saw the unemployment rate fall unexpectedly to 4.1% after spending months in the 4.3-4.4% range. Backing this up to indicate that the labour market retightened, the underemployment rate declined from 6.2% to 5.7% and total underutilisation fell to 9.8% (lowest since April 2023) from 10.5%. There was also encouraging news on the supply side as labour force participation rose from 66.6% to 66.7%.  

Total hours worked lifted 0.4% in December to be up by a respectable 0.6% over the quarter - though annual growth was subdued at just 1%. Over the past year, the part-time segment (2.1%) has led growth in full time hours (0.8%) by a wide margin.  

Australian Q4 Wage Price Index 0.8%; 3.4%yr

Australian wages growth was unchanged rising by 0.8% in the December quarter as the annual pace firmed from 3.3% to 3.4%. Both outcomes matched market and RBA forecasts. Following a 25bps rate hike earlier this month, markets are pricing in a further increase in the cash rate to 4.1%. A surprise - in either direction - in tomorrow's Labour Force Survey for January could see pricing adjust. 

The Wage Price Index, a quarterly measure of wage inflation in the Australian labour market, provided almost no surprises in today's release. Wages growth was 0.8% for the second quarter in succession - though the annual pace lifted from 3.3% to 3.4% after a downward revision was made to the prior quarter. Over the past year, wages growth has remained around its current pace, fairly modest by historical standards - though the RBA raised rates earlier this month maintaining that the labour market was tight and that the economy was more supply-constrained than thought. It also said that weak productivity growth meant that unit labour costs were putting upward pressure on inflation. 

Wages growth in both major sectors of the labour market - private and public - was 0.8% in the December quarter. However, a sharp divergence has emerged over the past year. Annual growth in public sector wages has climbed from a 2.8% pace a year ago to 4% currently, the fastest since Q2 2024. Meanwhile, annual private sector wages growth is currently 3.4%, virtually unchanged from 3.3% a year earlier.  

Analysis by the ABS in today's release shows that state government pay rises have been the impetus behind wages growth in the public sector. Over the past year, many state-based agreements have come into effect, which have frequently delivered multiple pay rises once backdated increases are included due to the time taken for these agreements to be negotiated and finalised. In the latest quarter, New South Wales saw public sector wages rise by 1.7% following a new agreement for frontline health workers. Overall, 29% of public sector jobs received a pay rise in Q4, with an average increase of 3.1% going through.  

ABS chart 

Government policy is also boosting private sector wages to some extent. The Commonwealth has funded pay increases to aged care and childcare workers, who typically work for private sector organisations. But wage dynamics in the private sector look to be moderate at best. Only 19% of private sector jobs saw a pay rise in the December quarter - higher than the 14% at the same time a year earlier - but the average pay rise of 3.7% was the same as a year ago. Two years ago, the average pay rise was 4.4% and at the peak in Q3 2023 it was 5.8%.  

Across industries, wages growth has picked up in household services, which reflects the boost to workers in aged care and childcare. By contrast, wages growth in the goods-related sector has remained on a slowing trajectory and has been broadly flat in business services.      

Preview: Wage Price Index Q4

Australia's Wage Price Index (WPI) for the December quarter is due to be published by the ABS today (1130 AEDT). A key measure of wage inflation in the domestic labour market, the WPI will be closely watched by the markets after renewed inflationary pressures prompted the RBA to hike rates by 25bps earlier this month. Although wages growth looks to have been fairly moderate in a historical context over the past year or so, a key distinction now is that the RBA sees the economy as more supply constrained than previously assessed, while ongoing weakness in productivity growth has persisted.   

December quarter preview: Steady as it goes  

The labour market was patchy through the middle of last year, but conditions appeared to strengthen over the final quarter. That was reflected in a pick-up in employment growth (73.8k in Q4) and a decline in the unemployment rate, which averaged 4.2% compared to 4.3% in the September quarter. However, the underlying conditions aren't expected to boost wage momentum. Quarterly wages growth is forecast to come in at 0.8% (range: 0.7-0.9%) for the third quarter in succession, which would see the annual pace remain at 3.4%.     

September quarter preview: Public sector steps up

Wages growth matched expectations rising by 0.8% in the September quarter, leaving the annual pace steady at 3.4%. In the quarter, the 3.5% increase to the minimum wage and awards as determined by the Fair Work Commission started to flow through; however, that was the smallest increase since 2021.

Private sector wages growth cooled to 0.7% in the quarter, slowing from 3.4% to 3.2% over the year - a low since the middle of 2022. By contrast, wages growth in the quarter was firmer in the public sector (0.9%) after a number of new state-based enterprise agreements came into effect. That lifted the annual pace from 3.6% to 3.8%, its fastest pace in over a year. 

Macro (Re)view (13/2) | Markets lock in on Fed cuts

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. 

Australian housing finance rises 9.5% in Q4

Australian mortgage lending surged in the December quarter to reach new record highs on the eve of the RBA's February rate hike. The value of new commitments rose by 9.5% in the quarter ($108.3bn), underpinned by a 5.1% rise in loan volumes (149.4k). Key factors supporting demand included the RBA's easing cycle (75bps in 2025), first home-buyer incentives, and population growth - all reflected in housing prices that rose in the order of 8-9% on a nationwide basis in 2025 according to Cotality.  

Activity in the domestic mortgage market was very strong through the back half of last year - strength that has caught the attention of the RBA and APRA through earlier measures to curb riskier lending. Lending ended the year at a record high of $108.3bn on the back of a 9.5% rise in the December quarter, increasing by 21.5% across the back half of the year - compared to growth of just 1.5% in the first half. The acceleration looks to reflect the RBA's 3 rate cuts (75bps total), and expanded measures by the federal government to help buyers with low deposits enter the housing market.

Accordingly, first home-buyer lending surged by 15.5% in the quarter - the strongest rise since the Covid period - to $19.3bn, just short of the record high from 2021. But loan volumes to the segment, despite lifting 6.8% in the quarter to 31.8k, were still more than a third (34%) below the Covid peak - a combination of factors that point to affordability pressures. According to today's release, the average loan written to first home buyers was around $608k as of the December quarter.

Lending to the two major segments - owner-occupiers and investors - was at record highs. Owner-occupier lending was up 10.6% for the quarter - its fastest gain since Q1 2021 - to $65.3bn. That was matched by 4.8% lift in underlying loan volumes to 89k. In the investor segment, lending rose by 7.9% across the quarter ($43bn) and there was a 5.5% increase in loans written (60.4k).  

Australian household spending tails in December

Australian household spending tailed as 2025 wound down, notching its first monthly decline since March 2024 with a 0.4% fall in December - a downside surprise on expectations (0.1%). Spending rose strongly through October (1.4%) and November (1%) alongside an extended Black Friday sales period and a busy calendar of major events. That strength in consumer demand - a key factor in the RBA hiking rates at last week's meeting - translated into a 0.9% rise in quarterly volumes.   

The ABS's Household Spending Indicator (a high frequency measure of bank card spending) clocked spending declining by 0.4% in December - its first month-on-month fall since March 2024. Spending accelerated in October (1.4%) and November (1%) on the back of growth in discretionary sales (1.8% in October and 1.2% in November) during the Black Friday sales and associated discounting as well as major sporting and cultural events. Discretionary spending then pulled back in December (-0.3%), as illustrated in the chart below, with notable declines seen in furnishing and household equipment (-1.7%), clothing and footwear (-2.4%), and recreation and culture (-0.5%). Hotels, cafes and restaurants (0.5%) were able to resist that pullback.       

Household spending in nominal terms lifted by 2.2% across the December quarter - the strongest quarterly rise in 3 years. In real or inflation-adjusted terms, spending saw a 0.9% rise in the December quarter to be up by 2.4% through the year. Strong gains in the quarter were recorded in clothing and footwear (4.1%), furnishing and household equipment (3.6%), and hotels, cafes and restaurants (1.5%).     

The 0.9% lift in quarterly volumes is a solid guide to growth in household consumption (HCFE) - the largest component of GDP - in the National Accounts. However, the HSI does not capture the totality of bank card transactions, and it also excludes major items such as rents, electricity, insurance and education.     

Macro (Re)view (6/2) | Hawkish RBA supports AUD

The postponement of the key nonfarm payrolls release for January until next week left markets with second tier US data and reporting results to focus on. Tech-related plays hit US and Asian equities this week on concerns that capex plans are escalating amid uncertainty over the return on investment from AI infrastructure. This was a factor in the USD seeing a modest rebound (still down 9.6% on 12 months ago) - though the local AUD remained supported following a hawkish hike from the RBA - while the BoE was dovish in holding and the ECB offered little resistance to euro strength. Next week's highlight is that delayed US payrolls report (Wed) as well as CPI data for January (Fri).    

A largely uneventful ECB meeting saw the Governing Council leave rates hold - the key depo rate remaining at 2% - with President Lagarde reaffirming the existing view that policy settings are 'in a good place'. The main interest was whether any cracks would emerge in that stance given the strength in the euro - ostensibly a headwind for growth for the export-oriented euro area economy. But at the post-meeting press conference Lagarde downplayed the effect of the exchange rate, pointing to the fact that EUR/USD was currently around its average level since its inception. Market pricing was unchanged for the ECB to remain on hold through the year. 

In another tight decision (5-4 majority), the BoE went back to holding rates (3.75%) after cutting by 25bps in December. Pre-existing market pricing for a June rate cut was vindicated as the statement noted 'Bank Rate is likely to be reduced further', while new forecasts in the quarterly Monetary Policy Report were unambiguously dovish. The outlook for growth and the labour market were downgraded, and inflation is now expected to undershoot the 2% target in 2027 and 2028. Governor Bailey at the post-meeting press conference said the key judgement underpinning the view that there was scope for lower rates reflected diminishing inflationary pressures. Softer demand conditions and an easing labour market are expected to see wage growth continue to ease, while the impact of the National Insurance increase will also fade out.     

The RBA hiked the cash rate by 25bps to 3.85% this week, recent data convincing the Board that the economy was more capacity-constrained - and inflation pressures were more persistent - than previously thought. New forecasts in the Statement on Monetary Policy helped shape that assessment. The inflation outlook was raised to be above the midpoint of the 2-3% target band through the next couple of years, with the labour market now expected to be tighter and growth stronger in the near term. A hawkish repricing followed as markets adjusted to the scenario of the RBA potentially hiking twice more this year, up from the single additional hike already priced.  

The key shift in the Board's thinking was that there was an excess demand component to inflation overshooting the target (3.6% headline and 3.4% core), adding to the existing pressures from price rises deemed more temporary - such as electricity with government rebates ending. Governor Bullock's comments at the post-meeting press conference and at the parliamentary testimony later in the week indicated the Board will retain its existing strategy, using monetary policy to gradually turn the tide on inflation in order to preserve the labour market. Markets therefore think back-to-back hikes are unlikely, pricing in the next increase in the cash rate for the May meeting. For more on this week's meeting, please see my review here. Also in Australia this week, data updates for December showed a pullback in dwelling approvals (see here) and a widening in the monthly trade surplus (see here).