Australian labour market tightens further; RBA unlikely to change course
Assessing this week's labour market data through the lens of the RBA's November meeting minutes points strongly to another 25bps rate hike next month. Employment showed renewed strength - coming through a slowdown in Q3 - to rise by a stronger-than-expected 32.2k in October (reviewed here). That outcome drove the unemployment rate down from 3.5% to 3.4%, a new low in the post-pandemic period and its lowest level overall since late 1974. The disruptions to the workforce caused by Covid-related absences showed further signs of easing, with the number of Australians working reduced hours due to illness falling to its lowest level in nearly a year. That helped drive a 2.3% surge in hours worked in October, its strongest rise since February. Rising employment accompanied by increased hours saw the labour market tighten further. In addition to the fall in unemployment, the broader underemployment rate fell from 6.0% to 5.9%, driving total labour force underutilisation down from 9.6% to 9.3% - a 41-year low.
Reflecting the tightening in the labour market, wages growth lifted from 2.6% to 3.1% over the year to Q3, running at its fastest pace since 2013 (reviewed here). Still, that pace is only at the bottom end of the range the RBA estimates to be consistent with sustainably delivering on its 2-3% inflation mandate - a point reiterated in the November minutes. The elevation in wages growth was also boosted by a strong quarterly rise of 1%, driven by a large round of annual wage reviews in the private sector, and increases to the national minimum wage and awards coming into effect. Compared to other advanced economies, wage pressures in Australia are on the more modest end of the scale, certainly relative to the US, UK and New Zealand. That in part can be attributed to Australia's rise in labour force participation to record highs coming out of the pandemic.
For the RBA, the Board's guidance remains that it "expects to increase interest rates further" and it has left its options open for the "size and timing" of those hikes depending on the data. However, the Board again noted that the combination of accumulated tightening and the lags of monetary policy justified moving at the conventional pace of 25bps hikes. Notably, it also highlighted indicators from supply chains and commodity prices and an outlook for below-trend growth in advanced economies as pointing to a weakening in global inflation pressures.
UK Chancellor outlines fiscal tightening
The UK government's Autumn Statement walked a fine line between supporting the economy through recessionary conditions over the coming year and stabilising debt over the longer term. Bank of England officials told the Treasury Committee this week that the risk premium priced into UK assets had largely unwound following the effective cancelling of the mini-Budget, giving Chancellor Hunt a relatively calm backdrop in the markets to map out the path for fiscal policy.
As UK inflation rose above 11% in October, the OBR highlighted the extraordinary scale of the shock households face with real incomes expected to be crunched by 7.1% over the next couple of years. The OBR anticipates the UK economy has already entered into recession and forecasts GDP to fall by around 2% over the coming year. Government support to cap energy bills has attenuated what would be an even more severe downturn but comes at the cost of higher public spending; the uplift sees it rising above 47% of GDP for the next couple of years - at least 4ppts higher than previously forecast.
The government's plans for austerity ramp up down the track from 2024/25 onwards, with spending pared back following the recession recovery. All up, £55bn in fiscal tightening measures have been set down by the Chancellor, with spending cuts and new taxes due to come roughly in equal measure. The effect of that tightening - together with an expanding economy - is projected to eventually put underlying government debt on a declining trajectory from 2026-27. The DMO published revised its revised outlook for debt issuance, estimating a reduction of around £24bn in gilt sales this year to £169.5bn; but net issuance in 2023/24 is expected to be higher at £188bn, and markets will also have to absorb sales of the BoE's gilt holdings in that period.
ECB remains hawkish
A Bloomberg article suggested the ECB could be set to ease the pace of its rate hiking cycle, with the report indicating support amongst the Governing Council for another outsized 75bps hike was lacking. That being said, euro area inflation is yet to peak, with October's readings finalised at 10.6%yr on a headline basis and 5.0%yr on the core rate. ECB President Christine Lagarde also delivered quite hawkish remarks in a speech on Friday, not only saying further rate hikes are on the table but also indicating monetary policy may need to be taken into restrictive territory.
The ECB announced €296.3bn of TLTRO III repayments had been made by banks under the first of three early repayment windows. That equates to 14% of the €2.1tn in liquidity taken up under the scheme. Retroactive changes were made to TLTRO III at the last ECB meeting that raise the interest rate payable on these loans, incentivising early repayments and contributing to a faster reduction in the size of the ECB's balance sheet - working in congruence with hiking rates.
