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.  

RBA Hikes Cash Rate to 4.10% in March

The RBA hiked the cash rate by 25bps to 4.10% at today's meeting. This is now back-to-back hikes, reversing two of the three cuts from 2025. The decision was widely anticipated (but against my contrarian view for a hawkish hold) - though it was much closer than markets and forecasters had expected, voted through on the narrowest possible majority (5-4). Governor Bullock said at the press conference that both voting blocs were in alignment over the need for a rate hike, the only distinction was in the timing. In the end, Governor Bullock said the majority gave the nod to today's hike due to higher petrol prices from the Middle East conflict adding to an already elevated inflation outlook, while recent data had indicated increased capacity pressures in the domestic economy.  

A hike at today's meeting was a decent chance ever since the February meeting when the RBA raised its inflation outlook, pushing back the timing of hitting the midpoint of the 2-3% target band until 2028. But a March hike remained an underpriced risk for a long time, with markets only latching onto expecting a hike last week - and from what Governor Bullock said was a misinterpreted signal in any case referring to Deputy Governor Hauser's podcast appearance. 

Higher petrol prices will put upward pressure on inflation, and Governor Bullock said the RBA needed to cool demand to ensure there is limited pass-through of this into prices more broadly - especially with the recent data showing economic growth and the labour market were even stronger than it had assessed. A lift in some measures of inflation expectations have also caught the Board's attention. These were the key factors for the majority supporting a hike.   

The case pushed by the minority on the Monetary Policy Board today (and the view I sided with) was that given the uncertainty around global growth and inflation due to the Middle East conflict, waiting was the prudent course, described by Governor Bullock as a hawkish hold. Caution amid this uncertainty will likely be one of the key themes to emerge from the plethora of other major central bank meetings (Fed, ECB, BoE, SNB, BoJ, BoC and Riksbank) later this week, making the RBA an outlier in hiking today. 

But for the RBA, if it didn't hike today, it was very likely to hike in May. It could still go on to hike in May; however, such market calls for a meeting 7 weeks away (May 4-5) are tenuous at best given today's split vote and not knowing how events in the Middle East will unfold or how the data domestically will come in. 

Preview: RBA March meeting

The RBA's Monetary Policy Board meets today with its rates decision due at 1430 Sydney time. Consensus has aligned around a 25bps hike in the cash rate to 4.1%, with market pricing (around 70%) and most institutions shifting their view to a hike last week, with a further hike in May also expected. The shift comes with the oil price shock stemming from the Middle East conflict set to add to the already elevated inflation pressures in Australia. My view is that the RBA will defy those expectations, leaving the cash rate on hold at 3.85% amid uncertainty over the global backdrop - but it will be a hawkish hold ahead of a likely hike in May. 

In February, the RBA hiked the cash rate by 25bps to 3.85%, reversing one of the three rate cuts from 2025 after updated forecasts showed inflation was expected to rise further above the 2-3% target band. While some of the contributory factors to the inflation overshoot are seen as temporary, it was also linked to capacity pressures in the domestic economy from strong demand and a robust labour market. After the February meeting, markets responded by adding a further rate hike into the profile in 2026, pricing in a total of 50bps of additional tightening by year-end. Markets, however, only assigned a low probability (10-20%) to a follow-up hike in March.   

That market pricing subsequently held firm for weeks, despite multiple speeches from senior RBA officials - and remarks from Governor Bullock that all meetings were 'live' - as well as upside surprises in the incoming data for GDP growth (0.8q/q, 2.6%Y/Y), unemployment (4.1%) and CPI (3.8%yr). The shift in rate-hike expectations only came last week, with markets reacting to of all things an appearance by Deputy Governor Hauser on The Conversation podcast (Politics with Michelle Grattan). Markets seemed to key off Hauser's fairly straightforward remarks that higher oil prices were likely to push the inflation outlook above its February forecasts. 

Markets latched onto this hawkish angle; however, Hauser's comments were more nuanced - he highlighted that growth would be impacted by increased geopolitical uncertainty, and that higher petrol prices would effectively act as a tax on domestic output and consumption. Hauser said there were risks around tightening into this outlook, and that RBA staff were working through a full range of scenarios ahead of the next forecast update in May.  

Make no mistake: the RBA could hike today. As I noted in some of my articles in recent weeks, a March hike was an underpriced risk - there was already a case for back-to-back hikes given the RBA's view on inflation. What I find surprising is that markets reacted so sharply to the Hauser podcast (only one voice of a 9-member board), especially given Governor Bullock has emphasised the collective nature of how the newly formed Monetary Policy Board will operate, avoiding pre-meeting guidance of any sort. It's also worth noting the Board composition has changed since February, with Bruce Preston replacing Alison Watkins following the end of her more than 5-year tenure. 

With all the uncertainties in mind - most notably around the effects of the oil price shock, putting upside pressure on inflation but downside pressure on growth - I expect the RBA to err on the side of caution and hold steady at 3.85% today. But it would be a clear hawkish hold, reaffirming that a more restrictive stance will likely be required as the year progresses to address the domestic inflationary pressures it is seeing. Either way this shapes as a very interesting meeting: a hold would potentially come across as a dovish surprise while a hike would align with consensus but still leave the additional tightening priced in subject to the events in the Middle East and the incoming data. 

Macro (Re)view (13/3) | Central Banks Confront Energy-Driven Inflation

The Middle East conflict has continued to elevate the importance of energy markets, with clarity remaining low over the duration of the conflict and the ensuing blockade of the Strait of Hormuz. Brent crude closed north of US$100/bbl for the first time since 2022, and now the second-order effects - the impacts on inflation and growth - are being worked through, driving cross-asset volatility. Increased inflation expectations have sent nominal yields higher, while the global rates outlook has been hawkishly repriced. The question ahead of the plethora of central bank meetings next week (Fed, ECB, BoE, SNB, BoJ, BoC and RBA) is what policymakers have to say about the situation: will they view the price shock as temporary and attempt to look through it or - wary of what happened following the Ukraine war - will they show signs of being more proactive.      

A 25bps rate hike to 4.10% at next week's RBA meeting has shot into favoritism, after hawkish comments by Deputy Governor Hauser warned of the inflationary risks stemming from the Middle East conflict. The market-implied odds of a 25bps hike - sitting below 20% at the start of the week - surged to around 70% as Hauser speaking on The Conversation podcast said the conflict would see inflation rise above the Bank's February forecasts (which among other variables factored in brent crude oil in the low US$60s), while GDP growth in the December quarter (0.8%q/q, 2.6%Y/Y) and data on the labour market had been stronger than expected. 

Hauser, however, also highlighted that there were risks associated with tightening into an outlook made more uncertain by the conflict, while higher oil prices would act as a tax on consumption and output. But markets have run with Hauser's more hawkish remarks. Effectively, the timing of the next rate hike - whether next week or in May (as was previously expected) - won't change the outlook greatly. The more important point in the debate is whether the conflict calls for an additional hike, given it will add to the already high domestic inflation pressures.

A hawkish repricing of the rates outlook has also taken place in Europe, coming ahead of next week's BoE and ECB policy meetings. Neither central bank will change policy (BoE 3.75% and ECB 2%) but the messaging will be key given markets have responded to the conflict by starting to price in rate hikes, with the memory of the inflationary surge following the energy price shock stemming from the Ukraine war still firmly in mind, even if there are differences this time around. That is a significant change given markets were as recently as last month pricing in two rate cuts from the BoE this year, while the ECB was seen remaining on hold.   

In the US, the Fed goes into next week's meeting with markets having moved towards pricing out the two rate cuts previously expected for this year. Data this week confirmed inflation was elevated ahead of the crisis. In January, the PCE deflator - the Fed's preferred measure - was well above target at 3.1%yr (the series was delayed by the government shutdown), while in February, headline CPI came in at 2.4%yr and core CPI was at 2.5%yr - both measures unchanged from January's reads. At next week's meeting, the Fed will update its key forecasts and the interest will be around whether the majority of FOMC members still see rates being cut once this year, as was the case in the last set of projections back in December.