Macro (Re)View (25/9) | Yields extend rise

US Treasury yields and the dollar continued to rise this week as strong growth data unlocked further upside, while soft auctions for 5 and 7-year bonds also contributed. Despite this, equities still advanced but were more patchy in Asia. While yields at the front of the US curve stand at their highest since 2024, the moves have been far more significant at the long end, with 10 and 30-year yields at levels last seen in the mid 2000s. Familiar themes have been at the centre of the moves amid concerns around inflation, fiscal sustainability and bond supply, geopolitical uncertainties, and a more hawkish Fed driving up the compensation required to hold longer duration securities. 

   

The final public comments from RBA officials ahead of next week's meeting reinforced the hawkish views that have a rate hike effectively priced as a done deal. August's labour force survey, despite reporting a lift in the unemployment rate to its highest level since late 2021 at 4.6%, did not change those expectations. RBA Governor Bullock's fireside chat at a CEDA event highlighted that higher inflation is the legacy left by the series of global shocks and weakness in domestic productivity in recent years. 

Bullock said policy needed to be calibrated to take pressure off inflation now so that it does not reset expectations. In the labour market, employment rose at almost double the expected pace in August, up 39.5k after a surprise fall in July (see here). However, that could not prevent the unemployment rate lifting from 4.5% to 4.6%, continuing its upward trajectory of the past year, as labour force participation increased to near record highs (67.1%). 

The underlying strength of the US economy was reflected in PMI data that showed activity expanded at its fastest pace in 5 years. The composite PMI registered at a 58.4 in September, defying expectations to slow (55.3) from July's 56 reading, well above the 50 marker that separates expansion from contraction. The services sector was the key driver (58.7), though manufacturing activity also expanded (57).  However, the report also showed inflationary pressures were accelerating, and it wasn't all due to the impact of higher fuel prices, with rising wages costs also a factor. 

In the euro area, economic conditions continue to show resilience to the headwinds it faces. September's PMI lifted to a 3½-year high (53.1). Notably, the manufacturing sector is the outperformer, seeing its strongest period in 4 years, supported by defence and AI-related investment. However, activity in the services sector is also making a contribution, expanding at its strongest pace of the year. As with the US, inflationary pressures picked up, though it is yet to impact growth.    

Australian employment 39.5k in August; unemployment rate 4.6%

Strong employment growth was unable to prevent Australia's unemployment rate lifting to 4.6% in August, its highest since late 2021. The report, mixed in many ways, had little effect on pricing for an RBA rate hike next week, remaining around 90%. There also appears to be some teething issues at play amid the overhaul of the series, with the ABS highlighting caution around the seasonality applied to the August figures.   

Employment rose by a net 39.5k in August, nearly double the expected increase (20k) and more than rebounding from the surprise fall in July (-15.9k). The August gain was driven entirely by a 45.8k contribution from the part time segment, with full time employment down 6.3k. Across the 3 months to August, employment gains averaged a solid 34k per month, its strongest momentum in 6 months. 

An uptick in labour force participation played a key role in seeing the unemployment rate rise. The participation rate increased from 66.9% to 67.1%, adding 67.7k people to the labour force. That exceeded the rise in employment (39.5k), driving the unemployment rate up from 4.5% to 4.6% - its highest since November 2021. However, with the broader underemployment rate easing from 6.3% to 6.2%, total labour force underutilisation remained unchanged at 10.8%.   

Hours worked have been volatile through recent months and that extended to August, lifting by 0.7% month-on-month. That reversed July's decline, while base effects saw annual growth accelerate to 1.7%. The growth in hours worked also significantly outpointed employment growth (0.3%). Full time hours rose 0.6% month-on-month (1.7%yr) - despite the contraction in employment - while part time hours rose 1.3% month-on-month (1.4%yr).  

Preview: Labour Force Survey — August

Australia's latest labour force report is due today covering the month of August. With an RBA rate hike close to fully priced at next week's meeting, the report is unlikely to be a volatility event as the Board's focus remains on the inflation side of its mandate. The unemployment rate is forecast to hold at 4.5%, sitting at the low end of the range that RBA Governor Bullock said earlier this week would help ease inflation pressures.       

August preview: Employment rebound forecast  

Markets look for a solid report today, with employment forecast to rise by 20k in the month (range: 10-47k), rebounding from a decline of almost 16k last time out. The unemployment rate, after rising to 4.5% in July, is expected to remain unchanged (range: 4.4-4.5%).  

July recap: Employment surprises to the downside

The unemployment rate lifted from 4.4% to 4.5% in July after employment surprised with a 15.8k decline (full time 16.3k/part time -32.2k). Employment was expected to lift by 12k following increases of 38.2k in May and 80.2k in June, its largest rise since April last year. Weighed by the fall in employment, hours worked declined by 0.6% month-on-month.  

In a series of mixed outcomes, while the headline unemployment rate rose, the broader underemployment rate held steady at 6.4%; however, total underutilisation ended up falling to 10.8% from a 4-year high (10.9%). The participation rate eased to 66.9% but is close to record highs.    

Macro (Re)View (18/9) | Hawkish Fed drives USD

A hawkish Fed meeting saw the US dollar reconnect with higher Treasury market yields as a key driver this week. The DXY lifted more than 1% to close at highs since late July above the 100 level. The Treasury curve flattened as yields at the front end lifted in anticipation of a Fed hiking cycle while yields at the longer end drew confidence that steps were being taken to address elevated inflation. While the Fed set the tone, other central banks were also hawkish, including the BoE and RBA. Meanwhile, the BoJ hiked rates, but the market reaction indicated developments fell short of reinforcing the hawkish expectations priced going into the meeting.  

A highly telegraphed rate hike from the Fed lifted the benchmark rate by 25bps to 3.75-4% in a unanimous decision by the FOMC. Chairman Warsh described the move as taking away 'a dose of accommodation' after saying he was 'hard pressed' to conclude financial conditions were restrictive enough to deal with inflation at his speech in Jackson Hole. History suggests once the Fed hikes more hikes follow. That is the scenario factored into the market curve, which discounts 3 more hikes coming through by mid next year. Updated projections from Fed members imply only at least 1 additional hike this year as officials also lifted their outlook for growth and inflation. However, that is still much more hawkish than its previous path for steady rates in 2026 ahead of a cut in 2027.  

The Bank of England left its key rate 3.75% this week as the MPC again returned a 6-3 vote. However, this decision was more hawkish than at the previous meeting after the committee highlighted rising risks to inflation, with Governor Bailey and other MPC members indicating that energy prices would need to fall to keep policy tightening at bay. That is not the BoE's base case as the central bank now expects that energy price rises will drive inflation to a slightly higher peak above 4% by early next year. 

The BoE also announced an overhaul of its balance sheet reduction plans, aiming to limit its involvement in the gilt market. The plans put a pause on active sales until at least April next year as the BoE explores options to sell holdings back to the government instead of the market, purchases that would be funded with new issuance. The BoE intends to restrict any such sales to maturities between 2035 and 2049, leaving aside its longest dated holdings (around £120bn) to back current and future banknotes. The balance sheet under these plans would run off in the background by £46bn annually, down from previous annual targets of £70bn and £100bn. 

RBA officials further reinforced market pricing for a rate hike at the September meeting following a parliamentary testimony hearing this week. Governor Bullock said some of the upside risks to inflation 'appear to be materialising' and the key question for the Board was whether policy was restrictive enough to deal with that. While growth has slowed and labour market conditions had eased, Bullock reiterated that capacity pressures remained after years of weak productivity growth had constrained the supply side of the economy.      

Macro (Re)View (11/9) | Yields on the rise

Higher oil prices following a reescalation of conflict in the Gulf renewed inflationary concerns this week, seeing bond yields rise sharply. Though given the scale of the rise in yields, the moves across equity and FX markets, for now at least, have been far from disorderly. Brent crude oil rose to highs since May pressing an intraweek high of nearly $110/bbl before ending the week below $105. The ECB hiked rates by 25bps this week and the Fed and BoJ are expected to do likewise in the week ahead.        

Key US inflation data only further raised expectations for a Fed rate hike at next week's meeting. Headline CPI for August rose 0.4%m/m and 3.4%yr, while the core rate printed a touch above consensus at 0.3%m/m, though the annual pace was 2.4% from a prior 2.5% in July. Despite his insistence not to offer policy guidance, Chair Warsh's Jackson Hole speech did effectively that as market expectations shifted towards a September hike, with the data since then reinforcing that outlook. Market pricing implies a tightening cycle of 3-4 hikes.    

The ECB delivered a widely expected 25bps rate hike this week but still managed to out hawk the market warning that inflation was 'set to remain well above target for an extended period'. This was the second hike since June, and the depo rate now stands at 2.5%. Markets are expecting the ECB will continue to move towards a much more restrictive stance, pricing in a further 75bps of tightening by mid next year. Whether or not that is ultimately required remains to be seen. ECB President Lagarde gave no clear signs of that at the post-meeting press conference, while new macroeconomic projections published by the central bank made only modest changes to its baseline outlook from June. Slightly stronger growth and higher inflation is now expected, though the changes were not a material reassessment of the outlook.  

Commentary from senior RBA members this week reinforced expectations for further tightening. The odds of a September rate hike sit at around 80%. Deputy Governor Hauser indicated unease over the inflation outlook had increased, while the bank's chief economist Hunter said that declining housing prices had yet to have a dampening impact on the economy. RBA officials in the week ahead will provide more insights on the economy and policy at their quarterly parliamentary testimony on Friday. 

Macro (Re)View (4/9) | US rates again in focus

Fed rates were back in the spotlight this week, with pricing for a September hike wound back after Governor Waller said current inflationary trends were sufficient to keep policy tightening at bay. However, that places a lot of emphasis on next week's US CPI report. Waller's comments were key to a softer USD this week (-0.5%), outweighing strong labour market data. The dollar was weakest against the JPY, so much so that there was speculation of currency intervention, though that has not been confirmed by Japanese officials. Domestically, resilient Q2 GDP growth firmed expectations for further RBA tightening, supporting the AUD.    

Comments from Fed Governor Waller around disinflationary progress were taken by markets as a contrast to Chair Warsh's address at Jackson Hole, casting doubt that the central bank is on track to hike rates. Waller said the upcoming inflation data (due Friday) would be the key factor in whether he votes to hold or hike. The labour market seems the least of the Fed's concerns following an upside payrolls report for August. Nonfarm payrolls rose 162k in the month, surging past expectations (55k), while employment over June and July was revised up by a combined 55k. The unemployment rate held at 4.1% even as participation saw a slight increase to 61.6%. Growth in average hourly earnings remained contained easing to a 3.1%yr pace from 3.2%.   

       

The ECB is set to deliver a widely expected 25bps rate hike next week, lifting the depo rate to 2.5%. Whether or not the ECB is prepared to make policy more restrictive will drive the market reaction. Economic conditions have been more resilient than expected, but there have been few signs of second-round effects on inflation. In August, headline inflation rose from 2.9% to 3.3%yr on energy prices, though core inflation eased from 2.5% to 2.4%yr - only just above the ECB's target. In the UK, BoE Governor Bailey said the central bank is committed to returning inflation to target but it has flexibility over the timeline. Markets are pricing in a BoE hike by year-end. 

Confirmation of resilient economic growth in Australia in the June quarter saw pricing for an RBA rate hike in September rise to around a 75% chance, while a full hike remains priced for November. The AUDUSD rose through 0.72 to highs since May. While on the currency, the AUD has defied a deteriorating current account deficit since 2023 (see here) to be up by around 10% in trade-weighted terms over the period. Trade data for July reported weakness for both exports and imports (see here).  

Real GDP surprised to the upside of market and RBA forecasts expanding by 0.4% in the June quarter and 2.1% through the year (reviewed here). While growth was slower over the first half of the year (0.7%) than in the back half of 2025 (1.4%), it held up better than feared from the headwinds of the fuel price shock, RBA rate hikes and a softening housing market. 

Household consumption led growth in the quarter as record EV sales boosted discretionary spending (1.4%). While sentiment was weak due to cost-of-living pressures, the fuel excise tax cut and robust labour market conditions have supported demand. Despite slowing (-0.5%), business investment has been the major driver of growth over the past year as the data centre build out has accelerated. 

Meanwhile, cycle lags mean current strength in dwelling investment (1.6%) is reflecting last year's rate cuts. A fall in dwelling approvals in July (-3.6%) may be the first signs of a turn in momentum (see here). Private demand all told has risen 3.6%Y/Y, supporting growth as public demand has slowed (1.9%Y/Y). A higher interest rate backdrop has seen government spending slow to a 3-year low. 

Australia's trade surplus narrows to $1.9bn in July

Australia's trade surplus came in at $1.9bn in July, above the $1.5bn figure expected. Exports (-3.3%) fell by more than imports (-2.5%), narrowing the surplus from $2.3bn in June (revised up from $1.9bn).  

July's $1.9bn trade surplus followed a $2.3bn surplus in June, marking back-to-back surpluses for the first time since the start of the year. The Gulf conflict has increased volatility in global trade, which was already recovering from tariff-related uncertainty. The 3-month average for the trade balance was a wafer-thin surplus of $0.6bn, down from $4.2bn a year ago. That compression reflects growth imports (14.1%yr) significantly outpacing exports (2.6%yr) 

Exports declined by 3.3% in July to $46.3bn (2.6%yr). The main source of weakness was in non-monetary gold, those exports down 26.1% on the month. Non-rural goods were broadly flat (-0.2%) as LNG exports lifted strongly (9.6%) only to be offset by declines in iron ore (-1.6%) and coal exports (-4.3%). Defying the trend, rural goods increased by 5.8% for the month on the back of a strong increase in cereals (19%). 

Imports were down for the third month running posting a 2.5% fall, coming in at $44.3bn (14.1%yr). Declines in global oil prices amid optimism around a durable reopening of the Strait of Hormuz saw fuel imports fall by 12.3%m/m, extending their decline over the past 3 months to 29%. That saw intermediate goods imports fall 7.8% in July. 

That outweighed increases in capital (6.7%) and consumption goods (3.5%). Data-centre related imports looked to pick up as ADP equipment rose 50% in the month, driving capital goods. Meanwhile, consumption goods were boosted by vehicle imports (8.2%), a key theme in yesterday's June quarter economic growth figures (see here).