Macro (Re)view (30/8) | Markets awaiting US payrolls report

The US dollar bounced off its year-to-date lows this week and the yield curve disinverted, leaving a near-flat spread across the 2-year and 10-year segments. Markets have fully absorbed the communication pivot from the Fed and are awaiting Friday's nonfarm payrolls data to determine whether the September cut will be either a 25 or 50bps move. Other highlights next week include a rate decision from the Bank of Canada, the ISM services survey (US) and the Q2 GDP report in Australia. 

Pricing for an RBA rate cut before year-end reduced modestly to around a 90% chance after CPI inflation slowed by less than expected to 3.5% in July (vs 3.4% forecast) from 3.8% previously (reviewed here). The early effects of government rebates on electricity bills were the main driver behind the slowing in headline inflation, with declines in petrol prices also a factor. Softer readings across the various measures of underlying inflation suggested to markets that the disinflationary process is continuing, thereby justifying RBA easing trades being maintained. Trimmed mean inflation eased from 4.1% to 3.8% and CPI ex-volatile items and travel was down from 4% to 3.7%. However, the lack of service price updates in the July report means that it is unlikely to have moved the dial for a relatively hawkish RBA. 

Data on Australian construction activity and capital expenditure came in weaker than expected, inputs that signal a subdued GDP growth outcome in the June quarter. My preview of Australian Q2 GDP (see here) covers the key details ahead of next week's national accounts release. The focus remains on the household sector that continues to adjust consumption in the face of cost-of-living pressures and higher interest rates. End-of-financial-year sales resonated with consumers through May and June before spending retraced to a flat outcome for July retail sales (reviewed here).  

Construction activity was broadly flat in Q2 (0.1%) but declined through the first half of the year (-1.9%) as the uplift in non-residential and engineering work - supported by an expansive public infrastructure pipeline - lost momentum and the residential segment remained weak (reviewed here). Private sector capital expenditure - a key support to growth as the economy has slowed - rolled over by 2.2% in the June quarter, its weakest outcome since the pandemic (reviewed here). The details in the report reinforced the theme that non-residential construction pulled back (-3.8%q/q) while equipment investment also softened (-0.5%). Nonetheless, forward-looking investment plans still came across as upbeat, upgraded by around 10% to $171bn in 2024/25, a 12-year high. 

A soft landing for the US economy appears to remain within reach for the Fed as Q2 GDP growth was revised up to an annualised pace of 3% (from 2.8%) and the latest inflation data was subdued. Headline PCE prices held at 2.5%yr in July (vs 2.5%) and the Fed's preferred core PCE index remained at 2.6% (vs 2.7%), slowing from 3.3% and 4.2% respectively a year ago. The overall picture painted is that economic growth is still resilient while inflation is making progress towards the Fed's 2% target. But, markets are clearly weary given the signals it has seen in the labour market, with employment slowing and unemployment rising. That in large part explains the aggressive easing cycle of 225bps of Fed cuts priced. 

In the euro area, inflation data for August matched expectations, keeping the ECB on track to cut rates again in September. Beyond the next meeting however, ECB officials - Executive Board member Schnabel chief among them - delivered a message throughout the week of moving gradually, cautioning markets pricing 75bps of cuts into year-end. Headline inflation slowed from 2.6% to a 3-year low of 2.2%, the decline mainly being driven by energy prices. Speaking to the ECB's caution, core inflation remains more elevated and eased only slightly from 2.9% to 2.8%, with services prices firming in the month (4% to 4.2%), likely associated with the Paris Olympics. 

Preview: Australian GDP Q2

The Australian National Accounts for the June quarter are due to be published by the ABS at 11:30am (AEST) today. Real GDP growth almost came to a standstill in the March quarter as the economic slowdown extended into 2024. Headwinds to growth continued to prevail in Q2, with a subdued outcome of around 0.2% for quarterly GDP anticipated. The focus remains on the household sector as the adjustment to higher interest rates and the increased cost of living continues to play out.   

A recap: Slowdown extends into 2024 

Real GDP growth slowed to 0.1% in the March quarter, moderating annual growth from 1.6% to 1.1%. This was the weakest annual growth rate outside of the Covid period since 1992. Growth has slowed alongside the normalisation of the post-Covid rebound and as domestic and international headwinds have taken effect. Domestically, the main dynamic has been cost-of-living pressures and higher interest rates weighing on consumption. Reflecting this, real GDP in per capita (population-adjusted) terms has been weak contracting by 1.3% over the past year.     

A key theme in Australia over the past year has been the strength in public demand (4.5%Y/Y), which has encompassed spending on major government programs and infrastructure investment. This has averted a sharper economic slowdown with private demand cooling (1.5%Y/Y).

Although historical revisions made by the ABS led to an uplift in household consumption growth over recent quarters, the pace in Q1 was subdued at 0.4% quarter-on-quarter and 1.3% year-on-year. The higher cost of living and the cash flow effects of increased mortgage repayments and rising tax payments have driven a significant decline in the household saving ratio over the past couple of years. 

As a result of these factors, one of the main adjustments households have been making is evident in the mix of consumption spending. Households have held back from additional discretionary-related consumption (0.1%Y/Y) as the demand for essentials has continued to rise (2.1%Y/Y).  

Business investment slowed in Q1 (-0.7%) but has been upbeat through the past year (3.9%) as firms have sought to increase capacity and invest in new technology. By contrast, dwelling investment remained weak (-0.5%q/q, -3.4%Y/Y), with higher interest rates, elevated building costs and capacity constraints continuing to weigh on activity.   

Weaker external demand and the slowing of the rebound in domestic tourism and education saw export growth slow over the past year from an 8.3%Y/Y pace to 3.2%Y/Y in Q1. Upward revisions to import growth - relating to spending by Australians overseas - raised the pace to 7.4%Y/Y, equating to a larger deduction to growth within GDP calculations. 

A preview: Headwinds to growth remain persistent 

Although the global backdrop improved over the first half of 2024, headwinds domestically continued to restrain growth. Most advanced economies offshore saw a pick-up in growth following a weak back half of last year. In China, growth in the June quarter was hampered by flooding and heatwaves, while the key property sector remained weak.  

In Australia, another subdued outcome for quarterly GDP appears likely. The overlay of pessimistic households continued, unabated over the past couple of years in response to high inflation and the pass-through of RBA rate hikes. 

Inflation, while still elevated, continued to ease supporting an improved dynamic for real household incomes, with tax relief and government subsidies for electricity bills coming into effect in Q3. The RBA has left rates on hold (4.35%) since last November, but the Board remains alert to upside inflation risks. 

Labour market conditions have remained a key support for consumption. Employment growth broadly matched the strong increase from Q1, continuing to defy the economic slowdown. This was holding down the unemployment rate and keeping the overall level of labour force underutilsation low.    

Amid these crosscurrents, indicators of household spending have been consistent with subdued consumption growth in Q2. Consumption growth was driven mainly by services spending, with weakness in goods-related spending evident in a 0.3% contraction in retail sales volumes, the 6th decline in the past 7 quarters.     

The fundamentals of tight supply and strong demand continued to put upward pressure on housing prices in most capital cities. Although there is a substantial volume of dwellings under construction, progress in working through this pipeline is being held back by labour constraints. At the same time, strong population growth has driven demand for housing, most notably in the capital cities where vacancy rates are at very low levels. 

Source: PropTrack 

Summary of key dynamics in Q2

Household consumption — Remained subdued amid cost-of-living pressures and ongoing weakness in sentiment. Retail sales volumes contracted further, with services-related spending continuing to drive consumption growth. 

Dwelling investment — Headwinds from higher interest rates, elevated building costs, capacity constraints and weak sentiment are all weighing on residential construction activity. In Q2, new home building looks to have declined modestly, though alterations lifted. 

Business investment — Lost momentum in Q2 and will likely weigh on GDP growth. Non-residential construction activity and equipment investment weakened. 

Public demand — Public demand is expected to add 0.4ppt to Q2 GDP growth, remaining a key support to domestic demand amid weakness in the private sector. 

Inventories — Set to deduct 0.3ppt from quarterly GDP, with a negative contribution from private non-farm inventories (-0.5ppt) moderated by a build in public authorities inventories (+0.2ppt). 

Net exports — Added 0.2ppt to GDP growth in Q2. Exports rose modestly (0.5%) as the post-Covid rebound in tourism and education services continued. Imports were softer in the quarter (-0.2%) driven by weakness in capital goods. 

Australian retail sales steady in July

Australian retail sales growth was steady in July, undershooting the consensus estimate of 0.3%. The July result comes after sales notched consecutive gains of 0.5% in May and June during the end-of-financial-year sales. Annual growth moderated from 2.9% to 2.3% - still a relatively resilient pace given the headwinds households have faced, albeit inclusive of the effects of strong population growth and retail price inflation. 

Retail sales in July came in at $36.2bn, the level unchanged on the prior month's total. Headline sales growth was flat as a 0.2% rise in food sales was offset by a 0.1% decline in spending across the discretionary categories. The decline in non-food sales comes after a 0.6% rise in the June quarter that was supported by discounting by retailers for end-of-financial year sales.   

Within non-food sales, declines in July were posted in clothing and footwear (-0.5%), department stores (-0.4%) and cafes, restaurants and takeaways (-0.2%). Household goods - the major beneficiary of the boost from end-of-financial-year sales - saw growth flatline in July, with other retailing also recording no growth. 

Retail sales growth was weak to subdued across the states in July. The strongest pace of growth is in Western Australia (0.2%m/m, 4.6%yr), with the state still well above all others on a pre-Covid comparison. The tone was lacklustre in the two major states, which account for a little over half of retail spending nationally: New South Wales -0.2%m/m, 1.2%yr and Victoria 0.1%m/m, 2.3%yr.  

Australian Capex -2.2% in Q2; 2024/25 investment plans $171bn

Australian private sector capital expenditure rolled over in the June quarter declining by 2.2% to post its weakest outcome since the pandemic. This sharply missed expectations for a 1% rise; however, the investment outlook still looks upbeat with projected spending plans for the 2024/25 financial year rising by 10.3% to $171bn, the highest level in 12 years.   

Yesterday it was the construction cycle losing momentum, today it was a similar story for capex. Against an expected rise of 1%, capex declined by 2.2% in Q2; however, an upward revision boosted the lift initially reported in Q1 from 1.0% to 1.9%. Overall, that left capex down marginally by 0.3% for the first half of the year.

The weakness in the June quarter was driven mainly by a 3.8% fall in buildings and structures investment, while equipment, plant and machinery also softened by 0.5%. The last time both capex components declined in the same quarter was 4 years ago following the onset of the pandemic, and 6 years ago if the Covid period is excluded. 

The question arising out of today's report is whether this is the start of a turn in the cycle or merely a pullback from the acceleration of the past few years. Capex accelerated coming out of the pandemic rising by more than 30% from the low in Q3 2020 to its peak around $41bn in Q1 2024. 

Slowing growth and uncertainty around the outlook suggest capex may unwind further from here. On the other hand, investment intentions (discussed later) still look upbeat in the near term, while factors such as the transition to renewable energy and investment in data centres and technology could be supportive on a longer-term horizon. 

Non-mining capex was down 3.6% in the latest quarter, swinging growth through the year from a robust 7.7% to -0.6%. However, as the chart below shows, the overall level of capex remains elevated. Buildings and structures saw a 7.7% contraction (-6.7%Y/Y) and equipment investment declined slightly by -0.2% (4.7%Y/Y). 

In the mining sector, capex advanced by 1.5% (2.6%Y/Y) following a 4% fall in Q1. A 2.8% rise in buildings and structures (3.7%Y/Y) more than offset a 2.1% slide in the equipment component (-0.3%Y/Y).   

Turning to the investment intentions component of the survey, firms nominated a figure of $170.7bn for their 3rd estimate of the projected capex spend in the 2024/25 financial year. This was an uplift of 10.3% on the previous estimate firms put forward 3 months earlier and 8.8% higher than a year ago. This puts capex on track to rise to a 12-year high this financial year. 

Non-mining investment plans were upgraded by 10.4% on estimate 2 to $118b for 2024/25. This came on the back of uplifts to projected spending on equipment (+14.8% to $55bn) and buildings and structures (+7% to $63bn). Mining sector plans were elevated by 9.9% compared to 3 months ago to a figure of $53bn. Upgrades of similar magnitude were made to plans for buildings and structures (+9.8% to $39bn) and equipment (+10.2% to $14bn).    

Australian construction work done 0.1% in Q2

Australian construction activity was broadly flat in the June quarter (0.1%), disappointing expectations for a modest rebound (0.5%) following a 2% fall in the March quarter. That left construction activity down 1.9% across the first half of the year, unable to press on from the 3.1% rise seen through the back half of 2023.   

The uplift in construction activity seen from the second half of 2022 onwards lost momentum as strength in non-residential and engineering work faded in the first half of 2024 and the residential segment - mired by a number of headwinds - remained weak. In the June quarter, construction activity lifted by just 0.1% as a 0.5% expansion in engineering work was largely offset by a 0.3% fall in building work. 

The divergence between the private and public sectors remains intact, with strength in the latter picking up the slack left from weakness in the former. Public sector work lifted by 1%q/q to be up by 7% through the year, driven by the ongoing rollout of a large infrastructure pipeline. This compares to private sector work, which declined by 0.3%q/q and 1%Y/Y. 

Looking more closely at the private sector, the weak result for Q2 (-0.3%) was centred mainly in the engineering component (-0.7%). Building work was flat overall, with non-residential work up 0.2% and the residential segment easing 0.1%. 

Private residential work remains weak, with activity contracting by 3% through the year. Higher interest rates, elevated building costs, weak sentiment from rising insolvencies in the sector and capacity constraints have all been factors. New home building was down 0.2%q/q and 2.8%Y/Y. Alterations stabilised in Q2 (0.3%) but have been unwinding from their elevated levels seen during the Covid period when this activity was supported by rate cuts and construction subsidies. 

From their Covid low in early 2021, non-residential work by the private sector surged by 25% to peak in Q4 2023. Activity has subsequently eased back but still remains at high levels. 

In the public sector, activity has started to show signs of levelling off, albeit at very elevated levels. Engineering work has advanced almost 11% over the past year reflecting progress in the infrastructure pipeline rollout by the federal and state governments.  

Australian CPI 3.5% in July

Australia's headline inflation rate slowed from 3.8% to 3.5% in July on a 12-month basis, a slight upside surprise on the 3.4% figure expected. This slowing was driven largely by the early effects of government rebates on household electricity bills, accelerating disinflation in goods prices to a 3-year low (2.8%yr). Underlying inflation showed signs of easing early in Q3, the trimmed mean in at 3.8%yr from 4.1%yr in June and CPI ex-volatile items and travel down to 3.7%yr from 4%yr. 

The July CPI report indicated that the disinflationary process in Australia was continuing early in the September quarter, albeit at a slow pace. The upside surprise in headline inflation drove a hawkish reaction that sent the 3-year bond yield up around 8bps to 3.55% and the AUDUSD above $0.68. However, the report should have few (if any) lasting implications from an RBA perspective, with Governor Bullock recently saying that the Board really only bases its policy decisions on the quarterly CPI reports that contain a full update of all prices in the CPI basket compared to the partial updates in the monthly reports. 

In July, the main action was in electricity prices as government rebates - at both the federal and state levels - started to come through. Electricity price inflation swung from 7.5%yr in June to -5.1%yr in July. The ABS reported that the monthly movement in electricity prices was a 6.4% fall but would have been a 0.9% rise without the rebates. The full effect of the rebates could take several months to come through due to timing differences in how the rebates are applied across the different schemes. 

The fall in electricity prices drove goods inflation down from 3.4%yr to 2.8%yr, a 3-year low. Fuel prices fell in July (-2.6%m/m) also contributing to goods disinflation. Inflation in new home building costs remains elevated but eased from a 5.4%yr pace to 5%yr. Pushing in the other direction, grocery price inflation lifted from 3.3%yr to 3.8%yr driven by higher prices for fruit and vegetables. 

Services inflation lifted from 4.3%yr to 4.4%yr, though little should be read into that given that the July report contained only a few price updates from this component of the CPI basket. Most notably, travel costs fell in July (-2.4%m/m) as demand cooled post the peak holiday season in Europe; however, the 12-month inflation rate for travel lifted from -0.7% to 0.2%.  

Macro (Re)view (23/8) | Rally extends on Fed pivot

Markets extended their rally this week as the Fed stepped up its intent to start dialling back restrictive monetary policy settings to lock in a soft land for the US economy. The US yield curve bull steepened, with the 2-year segment falling well below the 4% mark it has been anchored around over recent weeks. US dollar weakness remains broad based, the dollar index (DXY) now down by 3.5% over the past month. In other developments this week, Sweden's Riksbank cut rates by 25bps to 3.5%.  

Fed Chair Powell's landmark speech at the Jackson Hole Symposium has set the stage for the easing cycle in the US, starting at the September meeting. A 50bps rate cut looks to be back on the table, with markets repricing the terminal rate to around 3% by the end of next year, implying around 225bps of easing through the cycle. Chair Powell effectively formalised the hand-off in the policy focus from the inflation side of the dual mandate to maintaining full employment. The key insights were that the labour market had cooled to a point where it would not be a source of inflationary pressure, and that any further loosening of conditions was not sought nor welcome. With the Fed's more than 3-year battle with inflation just about behind it, Chair Powell declared that it was now time 'for policy to adjust' by removing restrictive settings. Although growth remained solid, the Fed was witnessing an 'evolving situation' with the incoming data suggesting upside risks to inflation had faded but downside risks to employment had risen.   

With the ECB's summer break drawing to a close, attention is turning towards the upcoming meeting on 12 September. Markets anticipate a rate cut at that meeting followed by another 1 or 2 more cuts before year-end. With the ECB on recess, insights have been thin recently, though the account of the July meeting was published this week. After starting its easing cycle the month before, the Governing Council held rates steady in July, with the account painting a cautious tone in a way that avoided sending too many policy signals. The main uncertainty highlighted was the evolution of wages, profits, productivity and services prices, inputs the ECB will receive updates on ahead of the September meeting that will factor into its assessment of the inflation outlook. The data received this week was supportive of a September cut as the ECB's tracker of negotiated wage growth slowed from a 4.7% pace to 3.6%Y/Y in Q2. On the activity front, August's preliminary PMI reading was consistent with modest economic growth at a 51.2 reading, up from 50.2 previously. This uplift was driven by the boost from the Paris Olympics, with services activity showing a sharper acceleration (53.3 from 51.9). 

The minutes of the RBA's August meeting reinforced the post-meeting narrative of the Board pushing back market pricing for rate cuts. According to the minutes, the discussion around the board table was that the slow pace of disinflation and the new assumption baked into the RBA's forecasts that the economy is operating with a larger degree of excess demand than previously assessed meant that a tighter policy path was required than priced by markets 'in order to bring inflation sustainably back to target within a reasonable timeframe'. But that is not a decisive win for the hawks, with the minutes later pointing out that by holding rates steady against dovish pricing, financial conditions would tighten by a 'comparable degree' to a hike in the cash rate. 

Macro (Re)view (16/8) | Sentiment rebounds

Market sentiment has rebounded strongly from the volatility-driven episode at the start of August. US data indicated that recessionary trades had been overdone, unlocking equity upside that had spillover effects across other regions, with risk-on sentiment also reflected in USD weakness. The Fed now looks more likely to start its easing cycle with a conventional 25bps cut rather than the frontloaded 50bps move earlier priced. The RBNZ joined the group of central banks now easing policy announcing a 25bps cut to 5.25% and giving dovish guidance.

Key US data published this week saw recessionary fears ease and inflation soften further, with markets repricing for a more measured start to the Fed's rate-cutting cycle. Public commentary from Fed officials has broadly given the nod to a September rate cut going into next week's Jackson Hole Symposium where a more formal pivot to policy easing is expected to be communicated by Fed Chair Powell. Retail sales for July posted upside surprises across the board in terms of headline (1.0%m/m vs 0.4% exp) and core sales (0.4%m/m vs 0.2%) as well as in the control group (0.3%m/m vs 0.1%) that markets view as the cleanest gauge of the pulse of consumer spending. This followed a stronger-than-expected rise of 0.9% in control group sales in June, highlighting that despite factors such as slowing employment, reduced household savings and higher interest rates underlying demand is holding up.

Data on US consumer and producer prices this week should play into giving the Fed the 'greater confidence' it has spoken of needing to conclude inflation is on track to return to the 2% target and then stay there. Headline CPI printed at 0.2%m/m in July and 2.9%yr (from 3.0%) and the core rate was 0.2%m/m and 3.2%yr (from 3.3%), with all outturns in line with market forecasts. Based upon these readings and those for producer prices (headline: 0.1%m/m, 2.2%yr; core 0.0%, 2.4%yr), markets anticipate the core PCE deflator - the Fed's preferred inflation measure - to come in at around 0.2%m/m and 2.7%yr in July. Although that would be a slight uptick in the annual pace from 2.6%, markets are more attentive to the month-on-month pace. A projected 0.2% outcome for July would be around what was seen in May (0.1%) and June (0.2%), a profile that, over time, would be consistent with meeting the Fed's 2% inflation target. 

Solid growth in the UK and elements of stickiness in inflation point to the BoE holding in September following its decision to start cutting rates earlier this month. Economic activity expanded by 0.7% in Q2 to be up by 1.3% through the first half of the year, a sharp contrast to the weak back half in 2023 (-0.4%). This swing was driven largely by household consumption (0.6% from -1%) as cooling inflation boosted real incomes, unlocking renewed demand. 

On UK inflation, headline CPI printed at 2.2%yr in July, up slightly from June (2.0%) but below consensus (2.3%); meanwhile, the core rate continued to ease coming in at 3.3%yr (vs 3.4% exp) from 3.5% previously. A key factor behind the softer core reading was services inflation slowing from 5.7% to 5.2%. Although moving in the right direction, core inflation and services prices - the part of the CPI basket of most importance to the BoE - remain elevated for a central bank now easing policy. Labour market tightness - also a key consideration for the BoE - while showing signs of easing, mainly in reduced vacancies (now down 32% on the cycle peak), is still reflected in wages growth. Weekly earnings (ex-bonuses) eased to an annual pace of 5.4% from 5.7% in this week's report. 

Appearing with the RBA's top officials at a parliamentary testimony, Governor Bullock again delivered direct pushback on prospects for a near-term rate cut in Australia. This places the RBA in contrast to many of its central bank peers in easing mode. While the RBA clearly doesn't want to hike any further, the data aren't allowing a dovish pivot either. That was reiterated by this week's data on the labour market. Employment outperformed expectations for the 4th month running surging by 58.2k in July, driven entirely by full time employment (reviewed here). 

Like many labour markets overseas, conditions are less tight than earlier in the cycle - the unemployment rate lifted from 4.1% to 4.2%, its highest since early 2022 - but are still robust overall. Encouragingly, developments on the supply side were also positive; the participation rate increased to a new record high of 67.1%, while hours worked saw back-to-back rises (0.3%m/m). Consistent with a labour market coming into a closer demand-supply balance, wage pressures have eased. In Q2, the Wage Price Index was softer than expected at 0.8% (vs 0.9%), leaving the annual pace at 4.1% (reviewed here).

Australian employment 58.2k in July; unemployment rate 4.2%

Resilient labour market conditions in Australia have continued into the second half of the year as employment accelerated further July (58.2k), surprising to the upside of expectations for the 4th month in succession. However, with the participation rate lifting to a new record high (67.1%), the unemployment rate increased from 4.1% to 4.2% - its highest level since early 2022. Markets responded to the employment number by paring expectations for an RBA rate cut by year-end. 

By the numbers | July

• Employment increased (on net) by 58.2k (full time 60.5k, part time -2.3k), printing above the 20k consensus and up from June's 52.3k rise (revised up from 50.2k). 
• National unemployment lifted from 4.1% in June to 4.2% in July, its highest since the start of 2022. Underemployment declined slightly from 6.4% to 6.3%, leaving labour force underutilisation broadly steady at 10.55%. 

• Labour force participation climbed from 66.9% to 67.1%, taking out the previous record high (67%) set in November 2023.

• Hours worked advanced by 0.4% month-on-month as growth over the year firmed from 0.6% to 0.9%.

The details | July

Employment continues to advance, defying the headwinds of slower economic growth. July's 58.2k rise made this the 4th month in a row in which employment has exceeded the outcome seen in the prior month. This surge has caught markets offside as employment has now surprised comfortably to the upside of expectations in each of the last 4 reports. I have been more optimistic than others in my view that strong population growth would be a key factor supporting employment this year, despite a backdrop of slower growth. The full-time segment has been responsible for driving employment growth over the past few months, a dynamic that was repeated in July as the full-time segment (60.5k) accounted for all of the net increase in employment, with part time falling (-2.3k).   

Labour markets globally continue to loosen from post-pandemic cycle tights reflecting weaker growth and the effects of monetary tightening; however, conditions in Australia are proving to be relatively more resilient. Strong employment has played a key role in slowing the rise in the unemployment rate here as labour force participation - boosted by population growth - has climbed to record highs. In July, the participation rate increased from 69.9% to 67.1%, adding 82.1k to the labour supply. Meanwhile, the employment-to-population ratio - the share of working-age Australians in employment - ticked up to 64.3%, a level materially higher than seen prior to the Covid period. These are significant developments in light of the RBA's recent assessment that the economy is more supply-constrained than it previously judged.   

National unemployment moved up from 4.1% to 4.2% in July, as the employment outcome (58.2k) was outpaced by the rise in participation (82.1k). Over the past 3 months, the unemployment rate has averaged 4.1%, its highest level on that basis since early 2022 and up from the cycle lows of 3.5% in late 2022. 

The broader underemployment rate (including unemployed workers and employed workers wanting additional hours) eased from 6.4% to 6.3% in July, its tightest since April 2023. Total labour force underutilisation was 10.6% (10.55% unrounded) from 10.5% previously, still at a historically low level (grey line in chart below) for Australia. 

Monthly hours worked increased by 0.4% in July following a downwardly revised rise of 0.3% in June (from 0.8%). Growth in hours worked over the year is running at a subdued pace of 0.9%, with many firms likely responding to slower demand conditions by reducing hours. Something to keep in mind, however, is that the ABS continues to highlight that the proportion of people working fewer hours than usual due to illness during the winter months is significantly higher than pre-pandemic averages. 

In summary | July 

Today's report was a very solid update, with strength evident in both the demand and supply side of the labour market. Inflation that is lagging global trends and a labour market that is proving stronger in Australia accords with RBA Governor Bullock's direct push-back to market pricing for a rate cut by the end of the year. The market won't have to wait long to hear from the RBA about today's report, with the Bank's top officials appearing before a parliamentary testimony in Canberra tomorrow.