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.
