Macro (Re)View (24/4) | Not so fast...

The reopening of the Strait of Hormuz referenced last week proved to be very short lived, with both the US and Iran reinstating blockades and restrictions. Market optimism was impacted as a result. Front month crude oil rose more than 13% for the week to close around $95/bbl, a headwind for equities and the more risk-sensitive EUR and AUD, while bond yields increased. Attention now turns to next week where the Fed, ECB and BoE are all due to hold policy meetings. Higher inflation is yet to show through in the data, so all central banks are likely to remain cautious - though the longer the crisis persists, a hawkish repricing of the rates outlook becomes a stronger possibility. 

The flash PMI readings for April were mildly consistent with stagflationary conditions - the main fear of markets surrounding the conflict - though growth was also displaying resilience, led somewhat surprisingly by the manufacturing sector despite surging fuel prices. The composite PMIs for the US (52) and UK (52) signalled an expansion in economic activity, having risen from March. Services activity rose, but the manufacturing sector was the key driver, with firms likely increasing output and restocking inventories in anticipation of supply disruptions. But there are questions going forward: confidence collapsed and input costs soared due to higher fuel prices. In the euro area, the composite PMI slipped into contractionary territory (48.6), but again the manufacturing sector saw an uptick.

Data in the US highlighted concerns around the consumer. The University of Michigan Survey confirmed sentiment in April collapsed to a record low. With fuel prices the obvious concern, inflation expectations for the year-ahead (4.7%) and long run (3.5%) horizons increased, a key point to keep in mind ahead of next week's Fed meeting. Markets still price some degree of easing this year, and the FOMC's own forecasts have one cut in the 2026 profile, but if there is concern around higher inflation expectations that could shift the narrative next week. Fuel prices underpinned a larger than expected 1.7% rise for retail sales in March, though the control group (that excludes fuel) at 0.7%m/m also surprised - the question is how durable that proves to be given the weakness in sentiment.

In the UK, headline inflation in March lifted above consensus rising by 0.7%m/m (vs 0.6%) to 3.3%Y/Y, though the full impact of the energy shock will come through household electricity and gas prices in later months. Core CPI eased a touch to a 3.1% annual pace, and that likely means the BoE will retain its wait-and-see stance at next week's meeting. Labour market weakness has been a key concern for the BoE, but there was some better news on that front. The unemployment rate declined to 4.9% from 5.2%, while earnings growth (ex-bonuses) also cooled to a 3.6% annual rate.

Macro (Re)View (17/4) | Green light on reopening

Market optimism on a reopening of the Strait of Hormuz has (temporarily at least) been validated, with Iran agreeing to allow the passage of commercial vessels. This applies for the 10-day ceasefire in Lebanon (to around April 22), though it is a firm step towards de-escalation that markets have priced in. Front month crude oil futures fell to around $85/bbl (lows since March 10) to close the week. Equities continued to climb ahead of the reopening announcement - and a little more after it - sending the US to record highs, while Europe was not far below its own peaks. The Australian dollar led advances against the USD and rates repriced dovishly.     

The Fed's Beige Book for April noted that activity across most US districts expanded at a 'slight to modest' rate. Amid the uncertainty associated with the conflict, the survey picked up that many firms were taking a wait-and-see approach, holding off from hiring, pricing and investment decisions. Higher prices for energy and fuel (as well as other inputs such as freight and fertiliser) were compressing profit margins. Employment levels were described as 'steady to slightly up', citing no discernable AI-related impacts.

Policymakers from the BoE and ECB attending the IMF meetings in Washington delivered plenty of headlines. Governor Bailey from the BoE again pushed back on market pricing for multiple rate hikes saying the UK economy was experiencing a 'very big energy shock' and that the best approach was to avoid rushing into judgements on what the appropriate response was. BoE Chief Economist takes a notably more hawkish stance, openly criticising this more patient approach. For the ECB, President Lagarde's comments were similarly aligned to Bailey's, highlighting a preference to proceed with a cautious and data-dependent approach. Executive Member Schnabel said the ECB was well placed having previously returned inflation to the 2% target without causing a recession. While considered a hawk, Schnabel said that the energy price shock will hit growth and weaken the ability of firms to pass through higher input costs to households.  

A solid Australian labour force report for March kept markets pricing in a high probability (around 70%) of a third consecutive 25bps rate hike in May. Comments from RBA Deputy Governor Hauser this week were also a factor. However, the confidence measures in the Westpac-MI consumer sentiment report (April) and the NAB Business Survey (March) have collapsed amid the current situation, highlighting risks for an RBA tightening into an uncertain outlook.  

Labour market tightness has been central to the RBA's hiking cycle, a narrative broadly reaffirmed by the March report as the unemployment rate held steady at 4.3%, matching expectations. A slight reduction in the participation rate to 66.8% allowed modest jobs growth of 17.9k (20k expected) to absorb the inflow of workers to the labour force (reviewed here). 

Speaking in the US this week, the RBA's Hauser said the fuel crisis added to the list of supply shocks that were pushing up inflation while weighing on growth. In that backdrop, while the RBA seems to want to hike further - especially if it sees signs that inflation expectations are moving up - he said there was a judgment call to make around the extent to which slower growth would help to ease capacity and inflationary pressures.   

Australian employment 17.9k in March; unemployment rate 4.3%

Australia's unemployment rate remained at 4.3% in March, matching market expectations. Employment increased sufficiently (17.9k) to absorb the number of new entrants into the labour market. The RBA has highlighted labour market tightness as a key factor in its current tightening cycle, delivering 25bps hikes in February and March. With today's report reinforcing that narrative, a May hike remains live - though there are clear risks to the labour market amid the conflict and its associated economic impacts.      

By the numbers | March

• Employment increased by a net 17.9k, just below expectations for a 20k rise. February's gain was revised up to 49.7k from 48.9k reported initially. 
• Unemployment remained at 4.3%, as expected, while underemployment (5.9%) was also unchanged; however, total underutilisation ticked up from 10.1% to 10.2%. 
• Labour force participation declined to 66.8% from a 4-month high of 66.9% in February. The employment to population ratio remained at 64%. 
• Hours worked rose 0.5% in March, rebounding from a 0.2% fall in February, to be up by 2.5% over the year. In the March quarter, hours worked increased by a solid 0.9%. 

The details | March

Employment rose for the 4th month in succession, increasing by a net 17.9k in March. Full time employment (52.5k) drove all of the gain, while part time employment fell (-34.6k) - the inverse February's composition (full time -27.7k/part time 77.3k).   

Following gains of 25.6k in January and 49.7k in February, the 17.9k rise in March saw employment increase by 93.1k in the March quarter - the strongest quarterly outcome since Q3 2024. This also put the 3-month average for employment at a respectable 31k. Overall, this indicates momentum in hiring was solid ahead of the headwinds to come from the fuel crisis and the RBA's tightening cycle. 

Labour market slack was little changed over the March quarter. The unemployment rate averaged 4.2%, down slightly from the December quarter (4.3%) and below the 4.3% level the RBA forecasts it to reach by mid-year. Both underemployment (5.9%) and underutilisation (10.1%) were in line with their December quarter averages. For a hawkish RBA running a narrative of a tight labour market, there is no reason to think there will be any shift in this regard.  

Labour supply is off the levels seen at its highs early last year - though amid renewed cost of living concerns, it could push higher again. The participation rate stood at 66.8% in March, in line with its average for the quarter. This compares to cycle highs just above 67%. Meanwhile, the employment to population ratio (the share of Australians in work) remains close to historic highs. 

A 0.5% rise came through for hours worked in March, after a modest decline in the prior month (-0.2%) and a solid gain in January (0.6%). Overall, hours worked lifted at a solid 0.9% pace for the March quarter, slightly outpacing the growth in employment (0.6%).   

In summary | March 

Today's report broadly aligned with consensus expectations, while it also likely serves to reinforce the RBA's existing views around labour market tightness. The May meeting is live for a third consecutive 25bps hike if the more hawkish majority of a split Monetary Policy Board continues to get its way. Quarterly inflation data for March on April 29 is the next key input to watch.

Preview: Labour Force Survey — March

Australia's Labour Force Survey for March is due today (1130 AEST). The RBA has raised the cash rate to 4.1% following back-to-back 25bps hikes, with its focus firmly on the inflation side of its mandate. However, the labour force report is still key ahead of the May meeting, where current pricing indicates the door is open for either another hike or a hold. The unemployment rate is expected to remain at 4.3%, after rising from 4.1% in January, while employment is forecast to increase by 20k.        

March preview: Employment trend key to RBA tightening cycle  

The unemployment rate is forecast to hold at 4.3% (range: 4.2-4.4%) in March, alongside an unchanged participation rate of 66.9%. Employment is expected to increase by 20k, with estimates ranging from 5-35k. As the chart below shows, employment (green line) is on a run of upside surprises relative to consensus (yellow line). 

If that trend continues, the RBA's narrative around labour market tightness, a central theme to its hiking cycle, is easier to sustain - even if the unemployment rate ticks up. By contrast, if employment starts to falter alongside a rise in the unemployment rate, tightening becomes harder for an already split Monetary Policy Board. Business and consumer sentiment surveys published on Tuesday have predictably collapsed amid the current situation, highlighting risks to employment in the months ahead.       

February recap: Unemployment rises; employment surges 

The unemployment rate rose unexpectedly from 4.1% to 4.3% in February - despite employment topping all estimates after surging by 48.9k (vs 20k forecast). The key factor was a rebound in the participation rate to a 4-month high (66.9%), resulting in growth in the labour force (83.9k) outstripping employment to drive the unemployment rate higher. The gain in employment was driven entirely by part-time employment (79.4k), while full time employment fell (-30.5k).   

Although the broader underemployment rate - including workers wanting additional hours - was steady at 5.9%, the rise in unemployment added to overall slack in the labour market - including unemployed and underemployed workers - increasing from 10% to 10.1%. 

Hours worked declined by 0.2% in April, but annual growth held at 1.6%. This followed gains of 0.4% in December and 0.6% in January - unusually strong outcomes for the summer holiday period. 

Macro (Re)View (10/4) | Ceasefire unlocks rally

Equities soared this week and risk-sensitive currencies rallied following the Middle East ceasefire, as Brent oil futures (June) fell almost 14% to 4-week lows below $95/bbl. This is still a significant premium to its $60-70 trading range through January and February ahead of the conflict, reflecting uncertainty over how flows through the Strait of Hormuz will now unfold during the next couple of weeks. The largest equity gains came in Asia (net oil importers), while the US and Europe rallied for the second consecutive week. Higher oil prices are starting to impact inflation figures; however, hawkish expectations for rate hikes continue to ease. 

US inflation rose 0.9%m/m in March (as expected) as fuel prices recorded a record increase of 21.2%m/m. That drove the annual rate from 2.4% to 3.3% (highest since May-24), though markets expected a 3.4% figure. However, there was little sign of a broader spillover into prices as core CPI undershot expectations at 0.2%m/m (vs 0.3%), firming from 2.5% to 2.6%yr (vs 2.7%). The conflict ceasefire allowed markets to begin repricing Fed easing this year, with the CPI figures then giving it a further nudge, currently sitting at around 10bps of cuts. The FOMC minutes from the March meeting indicated the Committee would be patient in cutting rates amid the energy shock pushing inflation higher; however, consumers are clearly feeling the strain. Consumption data in February was weak - personal spending was softer than expected at 0.5%/m (nominal) and 0.1%m/m (real) - while the University Michigan Sentiment index fell to a record low (47.6) in March. 

In Europe and the UK, final PMI reads for March confirmed cooling growth and upside risks to inflation from higher energy prices. The euro area index (50.7) registered a 10-month low and the UK's posted its weakest expansion in 6 months. Amid energy and supply disruptions, firms were facing higher input costs while order books and confidence were also suffering. Rate hike pricing has pared back in both regions this week, though markets still lean towards the ECB and BoE raising rates by year-end.     

Lacklustre Australian household spending data ahead of the fuel price shock and back-to-back rate hikes has cast doubt over the RBA's excess demand narrative. Spending in February was only able to post a 0.3% rise, matching January's modest gain - on track for its softest quarter since the second half of 2024 (reviewed here). Annual growth was little changed at a 4.6%yr, a level pace with growth in both discretionary and non-discretionary categories - though there has been a strong leaning towards services spending (6.2%) over goods (3.1%). 

Australian household spending up 0.3% in February

Australian household spending was modest at the start of the year, with a 0.3% rise in February matching January's gain. This came ahead of the fuel price shock, while back-to-back hikes from the RBA will be a further headwind for consumers. Spending rose at 4.6% pace through the past 12 months, with growth in discretionary (4.6%) and non-discretionary categories (4.6%) running neck and neck.   

Household spending was up by 0.3% through the first two months of the year, largely ahead of the headwinds the consumer now faces from the fuel price shock and the RBA's tightening cycle. In February, the 0.3% rise in spending was led by discretionary categories (0.5%), including recreation and culture (1.1%) and hotels, cafes and restaurants (0.4%). Spending in essential or non-discretionary areas was flat (0%): spending increased on food (1%) and health (0.2%) but fell in transport (-0.4%). Higher fuel prices will show up in a significant increase in transport spending from March, but the main interest will be around the impacts this has on other categories.    

Spending across services rose 0.5% on the month, outperforming goods (0.1%). This trend has also been evident over the past year with services (6.2%) dominating goods (3.1%). However, one factor that has dragged on goods has been alcohol and tobacco (-12.2%), associated with the rise in illicit tobacco sales the ABS has been unable to account for. 

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).