Macro (Re)view (20/12) | Fed turns hawkish into year-end

A hawkish turn from the Fed drove a steeper yield curve and a stronger dollar this week, setting global equity markets back. Although the Fed was expected to signal a slower pace of easing heading into next year, the shift went further than markets had anticipated. In other central bank news, a 25bps rate cut went through in Sweeden; the Bank of Japan held all policy settings; the Norges Bank was unmoved at 4.50%; while the Bank of England also kept a steady hand (more below).     

The Fed left markets with a hawkish imprint despite signing off for 2024 with an expected 25bps rate cut in fed funds to 4.25-4.5%; meanwhile, the reverse repo rate was adjusted 30bps lower to be flat to the fed funds floor (4.25%). However, all the action took place away from the policy decision. The Fed's summary of economic projections signalled a reduction in rate cuts in 2025 from 4 to 2, leaving policy 50bps tighter through 2026 (3.4% vs 2.9%). 

At the post-meeting press conference, Fed Chair Powell said that having lowered rates by 100bps, policy was now 'significantly less restrictive' setting the FOMC up to be 'more cautious' in making further reductions. Whether the shift reflects what the Fed has seen in the data or the anticipation of what 2025 could bring as Trump's pro-growth agenda comes to fruition is open to interpretation. While concerns over the labour market triggered the easing cycle, Chair Powell said those risks had receded but on the other hand inflation - while still on track to come back to the 2% target - was making slower progress than the Fed would like. Accordingly, the FOMC's inflation outlook was raised: headline PCE now seen ending 2024 at 2.4% (vs 2.3% prior) before firming to 2.5% in 2025 (vs 2.1%), while the core PCE profile was also revised up: 2.6% to 2.8% this year; 2.2% to 2.5% next year; and 2% to 2.2% in 2026. 

In the UK, the BoE's decision to hold rates at 4.75% came with a dovish shift in the vote split from 8-1 (hold-cut) in November to 6-3 on Thursday. Markets viewed the shift as somewhat surprising given key wage and inflation readings on the eve of the meeting either lifted or remained elevated. Average earnings pushed up from a 3-month annualised pace of 4.8% to 5.2% in October, above the 5% consensus figure. Meanwhile, increases in the year-on-year rates in November saw headline CPI rise from 2.3% to 2.6% (vs 2.6%) and core CPI firm from 3.3% to 3.5% (vs 3.6) as services prices held a 5%yr pace (vs 5.1%) - the latter two measures and wages growth having been clearly articulated by the BoE as central to its reaction function. 

The meeting minutes outlined that the three MPC members (Dhingra, Ramsden and Taylor) voting to cut by 25bps had read the conditions domestically as being characterised by weak growth and a cooling labour market, with higher uncertainty offshore also posing risks to the UK economy. However, the core of the MPC stuck with its guidance of a 'gradual approach to removing monetary policy restraint' and keeping rates 'restrictive for sufficiently long' until a return to 2% inflation was more assured.   

Australia's mid-year budget update (MYEFO) reported a deterioration in forecast deficits ($122bn to $144bn) amid increasing pressures on government spending and slowing revenue upgrades (reviewed in detail here). Market reaction was sanguine - the AOFM only modestly raised its bond issuance plans for the current financial year from $90bn to $95bn, a funding task roughly 50% complete already.

Whereas post-covid economic tailwinds swung the budget into surplus in 2022/23 and 2023/24 and gave the government headroom to fund new policy measures, that dynamic has now turned. Factoring in the new policy decisions included in MYEFO on top of those announced when the budget was tabled in May, new government measures - a combination of discretionary decisions and responses to existing pressures - come at a net cost of $40.7bn over the next 4 years, far outweighing an expected $5.1bn net boost to revenue over the period generated by the underlying economic conditions.

However, the continuation of strong public demand (government spending and investment) is a key factor behind Treasury's forecast for the labour market to remain resilient and for GDP growth to rise back to a trend pace over the next couple of years. As a result, the rise in the net debt to GDP profile is modest - certainly by global standards - forecast to lift from 19.6% to 22.4% across the forward estimates. 

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Thanks for reading Macro View through the year. 

A Merry Christmas and Happy Holidays to all,

James 

Australia MYEFO 2024/25: Deficit trajectory widens

In Canberra today, Treasurer Chalmers presented the mid-year update of the federal budget for 2024/25 handed down in May. MYEFO revealed a near $22bn deterioration in forecast deficits across the forward estimates, driven by an outlook for increased government spending - partly due to structural pressures on the budget and new policy decisions. Wider deficits drive increased government debt, but public demand is set to remain a key support for growth in the Australian economy.   

MYEFO 2024/25 | Fiscal Position

After consecutive budget surpluses in 2022/23 ($22.1bn) and 2023/24 ($15.8bn), the federal budget tabled in May forecast that Australia's fiscal position would deteriorate over the coming years. Today's mid-year update reported that the scale of that expected deterioration has increased. 

Although the deficit projected for the current financial year (2024/25) has narrowed from $28.3bn to $26.9bn, larger deficits are now anticipated across the forward estimates: $46.9bn in 2025/26 (from $42.8bn); $38.4bn in 2026/27 (from $26.7bn); and $31.7bn (from $24.3bn). Cumulatively, deficits are expected to run to $143.9bn over the next 4 years, widening from $122.2bn forecast in May's budget. 

This represents a stark turnaround. Australia ran sizeable surpluses coming out of the pandemic in 2022/23 and 2023/24 as the dynamics all turned in favour of increasing government revenues; economic growth rebounded sharply, reopened borders saw population growth surge, commodity prices hit elevated levels, and wages growth and inflation accelerated as the labour market tightened. But with those tailwinds now dissipating, the outlook is for the budget to be left exposed to structural pressures. Last year's Intergenerational Report identified 5 major structural pressures on the budget: health, aged care, NDIS, defence and debt interest.     

  

MYEFO 2024/25 | Overview 

The key movements in the budget balances in MYEFO compared to the May budget are illustrated in the chart below. 

In the current financial year, the forecast deficit has narrowed from $28.3bn in May to $26.9bn in MYEFO, with parameter changes the driving factor. Effectively, stronger-than-expected economic conditions are set to generate a larger tax-take for the government than forecast in May, marked up by $2.8bn. Resilient labour market conditions boost taxes from individuals by $8.9bn, while taxes from super funds are $2.1bn higher. However, company taxes have been lowered by $6.6bn since May - their first downgrade since 2020/21 - due to lower commodity prices hitting mining sector profits.   

In the out-years, the key dynamic is government spending (or payments) rising more quickly than government revenues (or receipts). This leads to wider deficits than forecast in the May budget.

Forecast government revenue was actually upgraded each year - but on a slowing trajectory - by $9.1bn in 2025/26, $3.4bn in 2026/27, and $2.3bn in 2027/28; however, those upgrades are outweighed by forecasts for uplifts in government spending of $13.1bn in 2025/26, $15bn in 2026/27 and $9.6bn in 2027/28.

Policy decisions taken since May and included in today's MYEFO cost the budget $19.1bn over the next 4 years. The new initiatives include: wage increases in the early education sector ($3.6bn); expanded Pharmaceuticals Benefits Scheme listings ($2.5bn over 5 years); NDIS funding ($0.9bn); improved child care access ($0.8bn); renewable energy ($0.8bn); and road and rail infrastructure ($0.7bn).     

Another policy decision of note is the government's plan to reduce student loans by 20% at a cost of $20bn over 4 years; however, that item has been treated as an 'off-budget' measure that hits the headline rather than the underlying cash balance.

Meanwhile, increased demand for government programs including in aged care, child care and disability support services, as well as higher debt servicing costs see parameter variations pushing up government spending by $23bn over the next 4 years. 

As a result of widening budget deficits, government borrowings will increase. Net debt is projected to rise from 19.6% of GDP this financial year to 22.4% by 2027/28, an increase in nominal terms of around $170bn over the period.   

MYEFO 2024/25 | Economic outlook 

Treasury's economic outlook for global growth has remained broadly unchanged since MYEFO, with the risks 'tilted to the downside'. The main headwind to Australia from offshore is moderating growth in the Chinese economy, which weighs on the outlook for commodity prices - reflected in a weaker terms of trade and slower nominal GDP growth (see domestic forecast table). Treasury noted that if its outlook for growth in China materialises, this would be the slowest 3-year period of growth there since the 1970s; however, the effect of recent stimulus announcements by the authorities remains to be seen.  

On the domestic front, Treasury continues to forecast a soft landing scenario, where the economy continues to grow as inflation gradually comes back to the RBA's 2-3% target band. The increase in government borrowings bolsters the outlook for growth in Australia; however, growth is still seen tracking a below-trend pace (sub 2.5%) over the next couple of years. As a result of below-trend growth, the unemployment rate is projected to rise to a peak of 4.5% with wages growth softening to a 3% pace. Headline inflation is forecast to return to the midpoint of the RBA target band in 2026/27.   

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Macro (Re)view (13/12) | Rate dynamics support USD

The US dollar remained bid this week as the Treasury curve steepened. Although a rate cut is still the expected outcome at next week's meeting, the Fed is set to guide towards a slower pace of easing in 2025. A more gradual easing approach from the Fed contrasts with the ECB that appears set to cut rates below neutral, while the BoC and SNB both cut rates by 50bps this week. Domestically, the RBA softened its hawkish tone. 

A dovish pivot from the RBA opened the door to rate cuts in Australia from early 2025, with the recent data seeing the Board 'gaining some confidence that inflation is moving sustainably towards target'. However, easing expectations are modest - the futures curve is pricing in 75-100bps of RBA cuts over the coming year to a terminal rate of 3.5% - in light of a strong November labour force survey that indicated the labour market was tightening again.

For the 9th consecutive meeting dating back to November 2023, the RBA left the cash rate at 4.35%; however, the key development was the Board softening its policy guidance, removing from its decision statement the communication of needing to stay 'vigilant to upside risks to inflation' and maintain rates at a 'sufficiently restrictive' level. RBA Governor Bullock confirmed at the post-meeting press conference that this had been a purposeful move; recent data had come in softer than expected and risks to the inflation outlook appeared to be receding. For more analysis on this week's RBA meeting please see my detailed review here. 

The RBA's next meeting in February had come into favouritism in market pricing for the timing of a rate cut, shifting forward from April ahead of this week's meeting; however, November's strong labour force report drove a reversal that now sees April as the anticipated start of RBA easing. A 35.6k rise in employment exceeded expectations (25k) - lifting from a subdued 12.1k last time out - to drive the unemployment rate down to an 8-month low of 3.9%, defying the consensus forecast to rise from 4.1% to 4.2%. An easing in the participation rate from 67.1% to 67.0% contributed to the fall in unemployment, but the level in November was just 0.1ppt below record highs. Alongside the decline in the unemployment rate, underemployment (6.2% to 6.1%) and underutilisation (10.3% to 10.0%) fell to their lowest levels since 2023, moves reflective of a tightening labour market. My review of the November Labour Survey covers the report in full here. 

Neither last week's payrolls report nor this week's CPI data in the US have swayed markets from expecting a 25bps cut from the Fed at the December 18 meeting. Both headline and core CPI came in on expectations in November at 0.3%m/m, the headline rate lifting from 2.6% to 2.7%yr as the core rate held at 3.3%yr. However, markets sense that with growth remaining strong and the labour market solid, the Fed will signal that it will slow the pace of easing in 2025. Currently, the Fed's dot plot points to 100bps of easing next year, but this looks set to be scaled back to 75bps in next week's updated projections. The focus will also be on the Fed's growth outlook - projected at 2% across the forecast horizon - in light of President-elect Trump's policy agenda to lower taxes, implement tariffs and restrict border flows.  

A 25bps rate cut to 3% on the deposit rate from the ECB came with dovish signals for more easing into 2025 with trade and political risks weighing on the growth outlook. According to a sources article from Reuters, some members on the Governing Council had pushed for a larger 50bps cut this week. The ECB has cut rates 4 times for a total of 100bps of easing since June, but policy remains in restrictive territory - well above the estimated 1.75-2.5% range for the neutral rate that ECB President Lagarde referred to in the post-meeting press conference. This gives a nod to rates continuing to fall next year, particularly as the ECB removed from its decision statement the pledge to 'keep policy rates sufficiently restrictive'. The ECB's latest projections kept the inflation outlook broadly unchanged, with the headline and core measures declining steadily to be back at the 2% target in 2026. 

Australian employment 35.6k in November; unemployment rate 3.9%

Australian employment rebounded in November (35.6k) to drive the national unemployment rate down to an 8-month low of 3.9%, defying an expected rise from 4.1% to 4.2%. Markets have priced out an RBA rate cut in February on the back of today's report. Employment continues to rise despite weak economic growth while wage and inflation pressures are slowing. The RBA continues to steer the narrow path.    

By the numbers | November 

• Employment posted a 35.6k net increase (full time +52.6k/part time -17.0k), above the 25k consensus forecast and up from a 12.1k lift in October (revised from 15.9k). 
• National unemployment rate fell from 4.1% to 3.9%, its lowest level since March 2024, against an expected rise to 4.2%. Underemployment (6.2% to 6.1%) and underutilisation (10.3% to 10.0%) fell to lows since April and September 2023 respectively.

• Labour force participation came in at 67.0% from 67.1% in October, moving down from a record high level after September's figure was revised lower by 0.1ppt from 67.2%. The employment to population ratio increased from 64.3% to 64.4%. 

• Hours worked saw their softest result since May coming in flat on the month (0.0%), easing annual growth to 2.1% from 2.2% (revised from 2.5%). 

The details | November 

Employment exceeded expectations rising by 35.6k in November after posting its softest result in 7 months (12.1k) last time out. The gain in the latest month was driven entirely by the full time segment (52.6k) as part time employment declined (-17.0k). Momentum in employment has slowed from its very strong pace during the September quarter; however, it is still solid averaging 35.9k for the 3 months to November.

Reflecting this, labour market conditions have tightening not loosening. Headline unemployment has declined from a recent high of 4.2% in July to print with a 3 handle (3.9%) for the first time since March. Although this is what stands out in today's report, the broader measures of underemployment and underutilisation have been declining over recent months. Underemployment is now 6.1%, its lowest since April 2023 and down a recent high of 6.7% just 6 months ago. Total labour force underutilisation has tightened to 10.0% - a low since September 2023 - from a high of 10.8% at the start of the year.     

The supply side of the labour market has been highly responsive to demand, with labour force participation and the employment to population ratio rising to record highs during this cycle and then remaining around those levels. Partcipation is not quite as high as previously estimated, with the ABS revising the peak down from 67.2% to 67.1%. Wage pressures in the Australian labour market have been less severe than in some countries overseas, and as RBA Governor Bullock noted at Tuesday's press conference, the recent Q3 Wage Price Index had come in a bit softer than expected - a factor behind the Board's dovish pivot.    

Hours worked in November flatlined following a run of month-on-month increases going back to May. Full time hours were up 0.2% for the month, offset by a 1.1% fall in part time hours. Total hours have lifted by 2.1% across the year, running slightly below the pace of employment growth at 2.4%. 

In summary | November  

The market reaction to today's report was sharp as the build-up in positioning for a February rate cut following Tuesday's RBA meeting was unwound. Overall, today's report suggests that the RBA continues to steer down the narrow path; employment continues to rise and inflation pressures are easing. The slowdown in economic growth in the Q3 GDP figures did appear to shift the Board's thinking to a more dovish outlook, but that will need to be weighed against the retightening in the labour market reported today. 

Preview: Labour Force Survey — November

Australia's Labour Force Survey for November is on the docket today (11:30am AEDT), the final major domestic data point to be released in 2024. Markets are running two-sided risks into the report after pricing in an earlier start to RBA rate cuts - potentially as soon as February - following a dovish pivot from the Board at this week's meeting. Another soft employment outcome on the back of October's underwhelming rise could give further momentum to February cut trades. By contrast, a strong rebound in employment could see easing expectations wound back.   

November preview: Employment outcome key after October moderation    

The key question around today's report is whether the moderation in employment to a 15.9k rise last time out - the first downside surprise in 7 months - proves to be a one-off or if another subdued figure prints. If it is the latter, markets may take that as a sign that the resilience in employment to slower economic growth is starting to fray with the surprisingly soft Q3 GDP growth figures (0.3%q/q, 0.8%Y/Y) reported last week still clear in the memory. Markets appear reluctant to call it one way or the other. The median estimate is for employment to rebound to a 25k rise around a wide band of estimates of 15-50k.      

The national unemployment rate is forecast to tick up to 4.2% in the month (range: 4.1-4.2%). As has been the case throughout much of the year, a modestly higher unemployment rate won't necessarily concern the RBA if employment is still rising at a solid pace and labour force participation remains around its current record high levels.    

October recap: A rare downside miss for employment  

Employment missed to the downside of expectations for the first time since March rising by a net 15.9k (FT +9.7k, PT +6.2k) against the 25k consensus. This marked a moderation from the run of solid increases over recent months. In the September quarter, employment gains averaged 52k per month.

Although employment fell short of expectations, the national unemployment rate remained steady at 4.1% for the third month in succession as labour force participation eased from record highs (67.2%). The broader underemployment rate continued to tighten printing at 6.2% in October, its lowest level since April 2023 and down from a recent high of 6.7% in May. Total labour force underutilisation remained at a multi-month low of 10.4%.  

A slight uptick in hours worked in October (0.1%) saw annual growth firm from 2.4% to 2.5%, its fastest pace since September 2023. Average hours worked per month have been steady at around 136 hours since May.  

RBA dials back hawkish stance to close 2024

The RBA signed off for 2024 leaving rates on hold at today's meeting (cash rate 4.35%, ES rate 4.25%), but a dovish shift from the Board has prepared some of the groundwork for rates to start being lowered in Australia early next year. Confidence around inflation returning to the 2-3% target band has increased while the labour market remains robust. To continue to steer down the 'narrow path', the RBA will want to avoid being late to reduce restrictive policy. A 25bps rate cut is fully priced by April but could plausibly come at the next meeting on 17-18 February if the Q4 CPI report (29 January) shows sufficient progress on underlying inflation.   

The RBA has maintained a hawkish narrative throughout 2024 against the backdrop of the global easing cycle, but the Board softened that stance in today's decision statement. Key references that have appeared in every statement since August of the Board needing to 'remain vigilant to upside risks to inflation' and maintain rates at a 'sufficiently restrictive' level were removed and replaced with the line that 'the Board is gaining some confidence that inflation is moving sustainably towards target'. In the post-meeting press conference, Governor Bullock confirmed these were deliberate changes that reflected an evolution of the Board's thinking after key data had come in softer than expected. 

My preview of today's meeting outlined that a dovish shift from the Board was possible but assessed as an unlikely scenario. That was due to Governor Bullock's most recent speech on 28 November reaffirming the RBA's hawkish tone around elevated underlying inflation, excess demand, and a tight labour market. But the unknown going into today's meeting was whether or not the weak set of National Accounts that subsequently reported GDP growth in Q3 at 0.3%q/q, 0.8%Y/Y on December 4 would be enough to shift the RBA's view. Ultimately, this appears to have been the case, so in that context, a dovish shift was a prudent move from the Board today.

Ultimately, the RBA left markets with the underlying message that policy is closer to being eased. Governor Bullock highlighted that soft data was a function of restrictive rates, leading to an easing of upside inflation risks and a reduction of demand-supply imbalances. A key uncertainty for the Board domestically is how quickly consumption responds to rising real incomes. The early signs from the Q3 national accounts have raised some risks around this dynamic. The summer break will now give the RBA the chance to assess the state of the consumer over the holiday period, as well as taking in key developments offshore. 

Preview: RBA December Meeting

The RBA is set to leave the cash rate on hold at 4.35% at its final meeting for 2024 today (decision due 2:30pm AEDT). The Board has held an unchanged stance on rates since November last year, consistently pushing back against prospects for rate cuts in Australia as the global easing cycle has ramped up. The RBA looks likely to maintain this narrative into its summer break; however, markets sense a rate cut is on the radar for early 2025. 

Much of the interest around today's meeting will be the RBA's response to the dovish repricing of the rates outlook in Australia. After seeing GDP growth for Q3 come in at a soft 0.3% last week (see here), markets moved to price in an earlier start to RBA easing - pulling forward the timing of a 25bps cut to April from June 2025 anticipated after the previous meeting - while also lowering its expectation for the terminal rate from 3.75% to 3.5%. 

Accordingly, the 3-year bond rate now trades around 3.8%, down from around 4.10% post the RBA's November meeting. The backdrop of lower rates has weighed on the Australian dollar, which has fallen by around 1.7% on a trade-weighted basis over the inter-meeting period; however, US dollar strength has been (by far) the driving factor following Trump's victory in the US election.   

All else equal, lower rates and a weaker AUD are not what a relatively hawkish RBA would welcome. That is unless the RBA saw enough warning signs in the Q3 GDP report to start softening its guidance of needing to 'remain vigilant to upside risks to inflation' and that maintaining a 'sufficiently restrictive' stance on rates continues to be appropriate. This appears an unlikely scenario given Governor Bullock's recent CEDA speech (28 November) focused on the familiar themes of elevated underlying inflation, demand exceeding supply, and tight labour market conditions. 

Soft GDP growth makes some of those assessments more contestable, but probably not to the extent where the RBA changes course to indicate that near-term rate cuts are now on its radar. One of Governor Bullock's main observations was that rates in Australia are still less restrictive than in many countries overseas where central banks have already eased monetary policy. This has been a by-product of the RBA's strategy to raise rates less aggressively to preserve the labour market while still placing downward pressure on inflation. 

Overall, expect the Board to hold its line into year-end of remaining vigilant to inflation risks and maintaining rates at a sufficiently restrictive level. Over its summer break, the Board will emphasise that it will pay close attention to the data both domestically and overseas. 

Macro (Re)view (6/12) | Equities advance to start December

Equities were broadly higher to start December as the US employment report kept a December rate cut from the Fed in play. US Treasury yields declined modestly over the week, led by the front end. Momentum in the US dollar faded but clearly remains the play - the OECD's latest outlook reaffirming that growth differentials favour the US. In Australia, soft Q3 GDP figures brought RBA rate cut pricing forward into early 2025.   

Swaps markets repriced on Australia's disappointingly soft 0.3% GDP growth outcome in the September quarter, putting an RBA rate cut in early 2025 firmly back on the radar. Pricing for a 25bps RBA rate cut has shifted forward to February/April from the second half of 2025 following hawkish messaging from the Board at the November meeting. This outlook faces significant event risk next week from the RBA's final policy meeting for 2024 followed by the November labour force survey. The questions to be answered are whether or not the RBA keeps pushing back on near-term easing prospects in light of weak growth, and will employment continue to defy the headwinds to prevent the unemployment rate lifting from 4.1% to an expected 4.2%. 

My In review series goes full flow on the September quarter National Accounts (see here), highlighting a subdued response by households to rising real incomes and fiscal support measures as the key dynamic. Some of the other main themes identified in the Australian economy are: the widening growth differential between private and public demand; falling commodity prices weighing on national income; and easing inflationary pressures (despite weak productivity). 

A range of other Australian data points were also published this week. The ABS picked up an early Black Friday effect as retail sales increased by 0.6% in October (see here); easing headwinds in the home building sector saw monthly dwelling approvals advance to a 2-year high (see here); falling commodity prices and a weaker terms of trade sees the current account deficit running at wides back to 2018 (see here); however, the monthly surplus on goods trade lifted to $6bn in October (see here). 

Markets see a cut at the Fed's December meeting as a done deal following the November employment report. The headline unemployment rate lifted from 4.1% to 4.2% in the month as nonfarm payrolls saw a lacklustre rebound of 227k (vs 220k expected) from October's hurricane and strike-affected slowdown (36k revised from 12k). Participation fell 0.1ppt to 62.5% - disappointing expectations to bounce back to 62.7% - while average hourly earnings held a 4%yr pace. Although payroll gains for the 3 months through November lifted to their highest since May at 173k, the pace is well down from the 225k average seen over the first half of the year. Slower momentum in employment supports the Fed remaining on its easing path. That said, however, both Fed Chair Powell and Fed Governor Waller hinted during their remarks this week that a slower pace of easing was on the cards next year. 

A light week for macro data in the eurozone left markets to navigate the broadening political turmoil across the core of the bloc, with the governments in Germany and now France collapsing. Other headwinds from geopolitics and the threat of trade tariffs are feeding into a growth outlook that ECB President Lagarde told the European Parliament was 'dominated by downside risks'. The ECB meets next week where the Governing Council is expected to cut rates by 25bps. In the UK, BoE Governor Bailey speaking at an FT event said that a gradual path of easing remained likely in 2025, where rates are cut at a quarterly frequency. The November issue of the BoE's Decision Maker Panel reported that inflation expectations remained broadly unchanged across a year-ahead (2.7%) and 3-year ahead (2.6%) horizon. Meanwhile, year-ahead wages growth was anticipated to slow to 4.0% from its current 5.5% pace. 

Australia's trade surplus widens to $6bn in October

Australia's goods trade surplus came in at $6bn in October (vs $4.5bn expected), its widest since February. Volatile non-monetary gold drove exports to their sharpest month-to-month rise (3.6%) since August 2023. Imports were broadly flat (0.1%) with capital goods falling but intermediate and consumption goods rising.   

The goods surplus widened from a downwardly revised $4.5bn in September (from $4.6bn) to $6bn in October. This was the largest monthly surplus since February's $7.1bn figure. The 3-month average for the surplus has inched up to $5.3bn, marginally up from the recent low of $4.9bn in May.

Export revenue accelerated by 3.6% for the month to $42.1bn. Yesterday's National Accounts and the balance of payments out earlier in the week reported that falling commodity prices are weighing on export income. Exports are down 9.2% over the year to October on these dynamics. In the latest month, non-monetary gold surged (43.8%) to drive the gain in exports. Non-rural goods saw a 1.3% rise, with LNG (15.4%) and iron ore exports (0.5%) outweighing a decline from coal (-6.9%). A modest decline came across in rural goods (-0.5%). 

Imports were little changed (0.1%) at $36.2bn in October, down 3.1% over the year. Capital goods fell for the third month in succession posting a 2.1% decline on this occasion. This weakness was offset by gains in intermediate (1.7%) and consumption goods (0.8%).