Macro (Re)view (30/5) | Tariff noise increases

Tariff confusion became even more elevated this week, though the reaction across broad markets was fairly contained. The White House insists it will impose its liberation day tariffs one way or another despite being ruled invalid by the International Court of Trade. In a further twist, Trump announced on Friday that his sectoral tariffs on steel, which were not affected by the court's decision, would increase from 25% to 50%. Increased uncertainty as well as a potential reduction in Japanese bond issuance contributed to lower yields globally this week. Meanwhile, the USD rose off the back of the tariff court ruling but those gains were not sustained as an appeals court granted a stay on the decision. 

US inflation data was encouraging as the Fed's preferred core PCE deflator came in at a soft 0.1%m/m in April to a 2.5%yr pace, down from a prior reading of 2.6%. But as highlighted in the minutes of the Federal Reserve's policy meeting from earlier this month, tariffs are expected to push up imported goods prices, with some concern that this will lead to spillover effects on inflation more broadly. On tariffs, April data showed the largest drop in monthly imports on record (19.8%), narrowing the trade deficit from $163bn to $88bn.  

At next week's meeting, the ECB is expected to continue its easing cycle with another 25bps rate cut, lowering the depo rate to 2%. Trump said he will delay his threatened 50% tariff on European imports until July 9 (from June 1), but the growth outlook in the bloc is still under pressure. In spite of this, trade weighted euro remains around record highs, which together with a weaker growth outlook, is reducing inflationary risks and that should keep the ECB's hawks in the minority. At the Bank of England, Governor Bailey reaffirmed that the strategy of 'gradual and careful' rate cuts remains appropriate amid the uncertainty of trade tariffs on UK inflation. 

In Australia, April's CPI report showed headline inflation held at a 2.4%yr pace in the ABS's monthly gauge, in line with the more comprehensive quarterly series from Q1 (see here). Although trade developments remain the most relevant factor for $AUD exposures, the data front has Q1 economic growth figures coming up next week. My preview discusses the relevant dynamics here, with growth of around 0.4% in the quarter expected. Household consumption remains subdued as highlighted by a soft outcome of -0.1% for retail sales in April (see here). Recent momentum in dwelling approvals is now retracing (-5.7% in April) as strength in the higher-density segment is unwinding (see here).  

Australian dwelling approvals fall 5.7% in April

Australian dwelling approvals fell by 5.7% in April, failing to rebound at the 2.8% pace expected following the 7.1% drop in March (revised from -8.8%). Downward volatility in the higher-density or unit segment has weighed on headline approvals in recent months seeing recent momentum in that series retrace. Approvals remain at low levels across all types as the RBA's tightening cycle has weighed on construction activity, while capacity in the sector has focused on working through the existing pipeline.      

Headline approvals broke below the 15k level for the first time since last September as a 5.7% decline in April followed the 7.1% fall in March. Approvals actually fell for the third month running when taking February's outcome into consideration, though that particular decline was by a very minor 0.1%. For the 3 months to April, approvals averaged 15.6k, the momentum falling back to levels seen at the end of last year. 

An unwinding of higher-density or unit approvals has seen headline approvals weaken over the past 3 months. Unit approvals were down 18.9% in the latest month to 5.1k following declines of 13.9% in March and 0.6% in February. As at January unit approvals (7.4k) had worked up to their highest level since December 2022. The available estimates indicate the decline has been centred in the high-rise segment in Sydney and Melbourne. 

Detached or house approvals rose by 3.3% in April, posting their fastest increase in 13 months. This result lifted approvals to 9.5k, a 7-month high to be 4.3% higher across the year. However, these approvals are more than one-third below their cycle high from 2021, a peak that was boosted by pandemic stimulus after the RBA had cut rates to the lower bound and government measures supported housing construction. 

Preview: Australian Q1 GDP

Australia's March quarter National Accounts are out this morning (4/6). Growth in the domestic economy was soft in 2024 as consumer demand was well contained under cost-of-living pressure and earlier RBA rate hikes. Public sector spending and investment have underpinned growth and employment for more than a year, helping to offset weakness in private demand. These dynamics remained broadly in place in early 2025, while adverse weather events also weighed on growth. Estimates sit around 0.3-0.4% for GDP growth in the quarter.  

A recap: Domestic economy subdued, underpinned by public demand  

Quarterly growth picked up at its fastest pace in 2 years as real GDP expanded by 0.6% in the December quarter, lifting annual growth from 0.8% to 1.3%. Despite this, underlying momentum in the economy has been subdued as cost-of-living pressures and higher interest rates have weighed on consumption and investment. The main driver of growth has been public sector spending, including household support measures and defence and infrastructure investment.  

After contracting marginally in the prior two quarters, household consumption rebounded with a 0.4% rise in the December quarter, supported by discounting during the Black Friday sales. This drove goods consumption to its first quarterly increase (0.6%) in a year. Although declining in Q4 (-0.4%), dwelling investment picked up over the year (2.5%); however, the level of residential construction activity is flat since the RBA commenced its hiking cycle in Q2 2022. Business investment lifted by 0.5% in the quarter but stalled across 2024. Strength in IP and equipment have helped to offset weakness in non-residential construction. 

Q1 preview: Global uncertainty adds to headwinds 

Headwinds to growth from offshore intensified in early 2025 as impending tariffs from the US administration ramped up uncertainty around global trade. Quarterly growth across OECD economies slowed from 0.5% to 0.1% in the March quarter, its weakest outcome since the pandemic. Trade activity brought forward to front run tariffs had varying effects on growth at the country level; in the US, a surge of import orders swung GDP into contraction in the quarter (-0.1%), but growth picked up in the euro area (0.3%) and UK (0.7%) supported by exports bound for the US market. This also boosted growth in China, though it still slowed from 1.6% to 1.2% in the quarter as momentum in the domestic economy remained soft. 

In Australia, growth through the early months of the year looks to have remained subdued. The RBA provided some support to demand by commencing its easing cycle with a 25bps cut to the cash rate in February, with data later confirming inflation returned to its 2-3% target band in the March quarter. Consumer sentiment showed signs of improving following the rate cut, but it has been stuck at pessimistic levels for 3 years now. 

Economic activity in the March quarter was partly affected by adverse weather. Cyclone Alfred impacted south east Queensland and northern New South Wales in early March, while Cyclone Zelia in northern Western Australia disrupted resources shipments in mid-February.

Summary of key dynamics in Q1

Household consumption — Has been slow to respond to improving real incomes as inflation has cooled, and with the labour market remaining robust. The RBA's February rate cut and follow-up move in May will take time to help turn the tide. Retail sales volumes stalled in the quarter, pulling back after rising strongly last quarter (0.8%) due largely to Black Friday discounting.      

Dwelling investment — Looks set to rebound from a contraction in Q4, renewing its earlier momentum from 2024. Partial data indicated both new home building and alteration work advanced over Q1.  

Business investment — Momentum stalled over the course of last year and appears to have been weak in early 2025, with private sector capex recording a small decline in Q1. Business surveys have highlighted margin pressures and weak demand as key concerns, while elevated uncertainty has weighed on confidence.   

Public demand — Lost momentum in the quarter as government spending flatlined and investment softened, despite a large pipeline of activity. 

Inventories — A modest add of 0.1-0.2ppt to GDP looks likely. No noticeable volatility in the partial data that pointed to the effects of global trade uncertainty.   

Net exports — Aside from isolated examples (most notably non-monetary gold) frontrunning of the US administration's liberation day tariffs was not broadly evident in the trade data, unlike many other countries. Net exports to weigh modestly on GDP growth in Q1 (-0.1ppt). 

Australian retail sales slide in April

Australian retail sales posted their weakest result of the year sliding by 0.1% in April, a much weaker outcome than the 0.3% rise expected. Annual growth slowed from 4.3% to 3.8%. A strong rebound in sales in Queensland (1.4%) after Tropical Cyclone Alfred in March was unable to drive a rise in the national figure due to weakness in other major states. The timing of Easter and other public holidays that fell in April may have contributed to the weak result. At the category level, warmer weather weighed on clothing sales in April (-2.5%) while food sales normalised (-0.3%) after being boosted in March by stockpiling in Queensland ahead of TC Alfred. Weakness in spending by households in the absence of discounting keeps further RBA rate cuts on the table.  

After coming off a 0.3% rise in March, national retail sales declined by 0.1% in April to come in at $37.2bn. This was the weakest outcome since December last year, defying expectations to rise by 0.3%. Momentum in retail spending has been weak in 2025; sales growth over the 3 months to April averaged just 0.1% and was flat across the discretionary categories. Measures including the Stage 3 tax cuts, energy bill rebates and RBA rate cuts look to be staving off further weakness rather than boosting demand. 

The profile of sales in April showed the decline in turnover was driven by food (-0.3%), clothing and footwear (-2.5%) and department stores (-2.5%). The ABS noted in today's release that its liaison with retailers had identified warmer weather in April as delaying spending on winter clothing. Food sales do not often fall on a monthly basis, but the drop in April came after a strong increase in March (0.8%), a gain that was driven by a surge in supermarket spending in Queensland (1.8%) as households in the south east region stocked up ahead of TC Alfred. 

Some categories rose in April, helping to moderate the overall decline in retail sales. This included household goods (0.6%), dining out (1.1%) and other retailing (0.7%). A post-cyclone boost in Queensland helped drive the gains in the first two categories. 

Across the states, the rebound in Queensland (1.4%) came not only after the TC Alfred-affected decline in March (-0.4%) but also a weak outcome in February (-0.3%). The profile of monthly sales has been volatile in most states this year, except for Western Australia where sales have risen consistently - in fact sales in the west have only recorded one month-on-month decline in the past 16 months. Sales in New South Wales fell by 1% in April, a sharp drop but that looks to be more seasonally driven than anything, coinciding with the Easter period and other public holidays; the last time sales fell by a similar amount was March last year when Easter fell.  

Australian Capex -0.1% in Q1; 2024/25 investment plans $188bn

The slowdown in Australia's capex cycle has extended into 2025, with a weak report for the March quarter coming amid a backdrop of soft demand conditions and rising uncertainty on the eve of the announcement of trade tariffs by the US administration. Capex declined slightly by 0.1% in the March quarter, defying expectations for a 0.5% increase while year-ahead spending plans were upgraded modestly to $156bn. 

Today's capex survey provides a partial read on business investment ahead of next week's quarterly economic growth figures. Business investment supported growth from 2023 onwards but faded over the back half of last year. This looks to have continued in early 2025. 

Capex declined by 0.1% in the March quarter, contracting by 0.5% through the year. Offsetting movements were seen in both major segments: equipment investment (-1.3%) saw its largest decline since the pandemic while the buildings and structures component advanced (1.9%), broadly consistent with yesterday's construction work report (see here). Weakness in the non-mining sector (-0.9%) drove the overall decline in capex but was moderated by a rise (1.9%) in investment in the mining sector. 

In the non-mining sector, capex declined (-0.9%) due to a 2% fall in equipment investment, its weakest quarter since Q2 2020. Buildings and structures rose by a modest 0.4%. Over the year to Q1, non-mining capex contracted by 1.6%, swinging from a 7.6% pace 12 months ago. 

A 1.9% rise in mining sector capex was its strongest quarterly gain since Q3 2023. The level of capex investment made by the sector has remained fairly stable over the past couple of years. Both components rose: equipment up by 2.4% and buildings and structures lifting by 1.7%.  

Today's survey included firms' 6th estimate of capex plans for the current financial year, as well as their 2nd estimates of year-ahead plans for 2025/26. Estimate 6 was upgraded by 2.2% to $187.6bn, an increase in line with historical revisions. That upgrade was driven entirely by the non-mining sector (+3.3% to $132.9bn). This estimate puts capex on track to rise by 3.6% on the previous financial year.     

Firms were also surveyed for their 2nd estimates of capex spending in 2025/26. From an initial estimate of $147.6bn, capex plans rose to $155.9bn for estimate 2 - an upgrade of 5.6% but only 0.7% above where estimate 2 for 2024/25 came in. In a historical context, these are very minor upgrades for this stage of the estimates cycle, pointing to cautious firms amid the uncertain outlook. Mining sector plans were raised by 6% to $49.6bn and the non-mining sector saw a 5.4% upgrade to $106.3bn. 

Australian construction activity stalls in Q1

Australian construction sector activity stalled in the March quarter as the weakest outturn from the public sector in 3½ years offset an overdue acceleration from the private sector. Adverse weather events in Queensland and New South Wales during the quarter appear to have had only minimal impacts on construction work at the national level. 

In the March quarter, the volume of construction work done remained steady on the prior quarter, disappointing expectations for a 0.5% rise. Activity flatlined around offsetting movements: engineering work declined by 1%q/q - its first decline in a year - but building work lifted by 0.9%q/q, its strongest rise by a very narrow margin in two years. Construction work had advanced in each of the previous 3 quarters going into today's report, the 0.9% rise in the December quarter being the most recent gain in that run. Overall, construction activity rose at a modest 3.5% pace through the year to Q1.  

The weakness in the result for engineering work (-1%q/q) was driven by the public sector (-3.4%q/q), with the private sector recording a lift (1.2%q/q). Despite falling during Q1, public sector investment in infrastructure has ramped up significantly in recent years, and a large volume of work remains in the pipeline.  

It was a similar profile for building work, advancing overall by 0.9% in the quarter with the private sector driving growth (2%) as the public sector saw activity go backwards (-5.6%), posting its sharpest fall since Q3 2021. Strength in private sector building came largely from the residential segment, with the volume of work done rising to a 5-year high on the back of a 1.5% rise in Q1 (6.8%Y/Y). The sector looks to be regaining some momentum having come through significant headwinds of post-pandemic supply constraints and the RBA's tightening cycle in recent years. 

Non-residential work was broadly flat in Q1 (-0.1%), with a pullback in the public sector again weighing on growth from the private sector. Private non-residential work advanced by 3% for the quarter, its strongest result since Q4 2023. 

Australian CPI 2.4% in April

Australia's headline inflation rate held steady at 2.4% in April according to the ABS's monthly CPI gauge, slightly above the 2.3% expected figure. Decreasing inflation risks led the RBA to cut rates earlier this month, the second cut of its easing cycle as Governor Bullock indicated the rates board was prepared to reduce the cash rate further as required.

The monthly CPI gauge lifted by 0.8% in April, holding the annual pace steady at 2.4% for the third consecutive month. Prices in April increased by 0.7% in each of the past two years. Being the 'front' month for the more comprehensive quarterly CPI series, only a little over 60% of prices in the CPI basket were updated in April. The main movement came in electricity prices, rising by 1.5% in April as government rebates continued to unwind. 

Electricity prices are still 9.6% lower than a year ago, reflecting the effect of the rebates from state and federal governments. Without those, the ABS estimates electricity prices would have risen by 1.5% over the year. In other goods categories, clothing and footwear prices ticked up from 0.7% to 0.8%yr but inflation pressures from food (3.1%yr) and fuel (-12%) eased. 

Overall, goods inflation firmed from 0.9% to 1.2%yr. Services inflation also lifted slightly from 3.9% to 4.1%yr, albeit rising on limited price updates. In the quarterly CPI series, services inflation showed encouraging progress slowing to 3.7%yr in the March quarter, its weakest pace since Q2 2022.   

  

The various measures of core inflation lifted in April but remained below the top of the 2-3% target band. CPI on a trimmed mean basis firmed from 2.7% to 2.8%yr while CPI excluding 'volatile items' was 2.9% from a prior reading of 2.7%; if holiday travel is also removed, inflation ticked up from 2.6% to 2.7%yr.  

Macro (Re)view (23/5) | Calm halted

The relative period of calm that allowed equity markets to rally off April's lows was halted this week as President Trump threatened a 50% tariff on the European Union and concerns over US deficits remained prominent. Trump cited a lack of progress in talks with the EU in announcing plans to impose the new tariff from June 1. Meanwhile, Trump's bill to fund the extension of tax cuts by reducing spending in safety net programs was narrowly voted through the house and now heads to the senate. The bill is estimated by the Congressional Budget Office to increase US debt by over $2tn over the next decade, reflecting the concerns that prompted the ratings downgrade from Moody's last week. Term premium - the additional compensation investors require to hold long-term debt securities - has been all the talk this week as yield curves steepened, a headwind for equity markets as higher discount rates put downward pressure on company valuations. The US dollar saw renewed weakness to be 4.5% below its early April levels prior to Trump's tariff announcements.    

The second 25bps cut of the RBA's easing cycle lowered the cash rate to 3.85% this week. In contrast to the hawkish messaging that accompanied the previous rate cut in February, the RBA has subsequently turned more dovish as Governor Bullock revealed in the post-meeting press conference that the Board discussed the case for a larger 50bps cut. Market pricing is shifting towards factoring in 3 further rate cuts this year, reducing the cash rate to 3.1% by year-end. With inflation returning to the 2-3% target band in the March quarter, the RBA's latest forecasts in the May Statement on Monetary Policy highlighted downside risks to the outlook for both growth and inflation in Australia stemming from the tariff war. More on this week's RBA meeting can be found in my review here. 

Markets continue to reassess the outlook for the Bank of England's easing cycle. Data this week showed inflation rose more sharply than expected in April, arguably giving more impact to the hawkish elements at the last BoE meeting that surprised markets. A shallower market curve that prices in between 1 to 2 further rate cuts by year-end reflects these factors, implying less confidence the BoE will continue with its sequence of quarterly rate cuts. 

UK inflation was expected to pick up in April due to seasonality and increases in household utilities costs, but headline CPI rose from 2.6% to 3.5%yr to exceed the expected figure of 3.3%. Additionally, core CPI lifted from 3.4% to 3.8%yr, above expectations for 3.6% as services prices - the key area of the basket under the BoE's scrutiny - pushed up from 4.7% to 5.4%yr. Inflation was skewed higher in April by Easter holiday prices rises, higher utility costs and an increase in road tax, factors the BoE took into account in its decision to cut rates earlier this month. Still, the report adds to the uncertainty around the inflation outlook that is already significantly clouded by the tariff war.  

In Europe, the threat of a 50% tariff on its exports bound for the US market has only amplified expectations for ECB rate cuts. Market pricing has increased to three 25bps rate cuts over the remainder of the year from two cuts at the start of the week. Even prior to Trump's tariff threat the account of the ECB's previous meeting in April pointed to the continuation of rate cuts with rising confidence that inflation was increasingly under control. Wage pressures also showed a notable cooling to a 2.4% annual pace in Q1, well down from 4.1% previously. Some slippage in the PMI readings in May indicated growth in the bloc was stalling due to tariff uncertainty. 

RBA cuts cash rate 25bps in May

A dovish tone to the RBA's decision to lower the cash rate by 25bps to 3.85% has pushed market pricing for further easing by year-end from 2 cuts going into today's meeting towards a third cut. Today's cut makes the cash rate 'somewhat less restrictive' according to the Board, a follow-up move from the first cut of the easing cycle in February. But with updated forecasts showing the recent return of inflation to the 2-3% target band is expected to be sustained, risks associated with the tariff war have prompted a more supportive stance from the RBA. The main surprise from Governor Bullock's post-meeting press conference was that the Board discussed a larger 50bps cut but unanimously settled on the expected 25bps move. 

Today's dovish cut is in contrast with the hawkish messaging that accompanied the February cut as the Board started to lower the cash rate from its cycle peak of 4.35%. Back then, Governor Bullock actively pushed back on market pricing for a year-end cash rate at 3.6%. It was a very different message today; inflation risks have diminished; cautious households have not been spending as expected with real incomes picking up; and risks from offshore have elevated due to global trade being upended by tariffs. To underline that last point, mentions of 'uncertainty' in the latest Statement on Monetary Policy increased by more than 140% on February's edition.

Regarding global trade, Governor Bullock said the RBA sees the tariff war as posing disinflationary risks. Amid the backdrop of tariffs reducing trade and weakening demand, the domestic growth outlook in the RBA's updated forecasts was revised down to 2.1% this year (from 2.4%) and 2.2% next year (from 2.3%). As a result, the unemployment rate forecasts were nudged up to 4.3% from 4.2% in both years. Importantly, confidence in the inflation outlook has risen since the easing cycle commenced. The latest view is that inflation (both on a headline and core basis) will hold in the target band across the projection horizon out to mid 2027. These forecasts are predicated on the market curve for RBA rates ahead of today's meeting.   

Aside from the baseline outlook, the decision statement noted that the Board considered a scenario with more severe effects on the Australian economy from the tariff fallout. The placement of that detail was to point out that the RBA has the policy firepower to respond. Going forward the statement reiterated the Board retains a data dependent stance and it will be continually assessing the risks to growth and inflation. The next RBA monetary policy meeting is on 7-8 July. 

Preview: RBA May Meeting

The Reserve Bank of Australia (RBA) is expected to lower the cash rate from 4.1% to 3.85% at today's meeting (due 1430 AEST), delivering its second 25bps cut of the easing cycle. Although the decision is likely to be more finely balanced than the 'lock' implied by market pricing, inflationary progress and a labour market that has rebalanced from peak tightness should pave the way for a cut today. Pricing for a further two cuts by year-end to 3.35% will be assessed against the RBA's updated economic forecasts and the tone of Governor Bullock's post-meeting press conference.  

After commencing its easing cycle with a 25bps cut in February, the RBA is set to deliver a follow-up cut today. Labour market strength and uncertainty around the outlook shape as the main risks to a cut. But recent progress on the inflation side of the Board's mandate, notably core inflation at 2.9% returning to the 2-3% target band for the first time since 2021, will likely be given more weight, guiding the decision towards a cut. 

At the February meeting, the Board noted that the incoming data had increased its confidence that inflation was on track to return to target. It therefore decided to cut, framing the decision as reversing the final or 'insurance' hike of the tightening cycle from November 2023 when upside risks to inflation were the concern. In lowering the cash rate to 4.1% in February, the Board judged that monetary policy remained at a restrictive level. If the Board does cut today, expect it to communicate the move as aligning with this broader strategy of gradually dialling back the tightness of monetary policy.  

New forecasts in the May Statement on Monetary Policy will accompany today's decision. As has been the case for its central bank peers, uncertainty will be the overarching theme for the RBA. The worst-case scenario in the tariff war looks to have been averted with the US and China now in a 90-day truce of significantly lower tariffs; however, there is still a lot of water to go under the bridge, and the impacts on growth and inflation across the globe from the tariff announcements by the US administration remain unclear.

In that situation, the RBA's forecasts may well see little change in this update. The central scenario in February was for moderate economic growth in 2025 (2.4%) and 2026 (2.3%), though the risks this year may now be skewed a little to the downside. The Board's increased confidence in the inflation outlook should have been given a further boost by headline (2.4%) and core inflation (2.9%) returning to the target band in Q1. Additionally, risks to inflation from the labour market have eased. Unemployment is in the low 4s but tracking in line with the RBA's forecasts, while wages growth - despite firming to 3.4% in Q1 - is well off cycle highs.   

Macro (Re)view (16/5) | Trade truce inspires risk

A 90-day truce on severe trade tariffs between the US and China helped unlock large gains for US equity markets this week and remove some of the risk premium traders have embedded into the US dollar. Both sides have agreed to reduce tariffs on each other's imports by 115% - the tariff rate imposed by the US falling to 30% and China's to 10% - creating a positive backdrop for risk sentiment. With expectations for Fed easing turning less dovish on an improved economic outlook, Treasury yields were left to rise as the focus returned to deficit concerns - a move reinforced by the news on Friday of a ratings downgrade from Moody's.      

Tariff-related volatility saw markets taking a string of softer-than-expected data prints in the US this week as more noise than signal. Inflationary pressures were yet to show any notable tariff effects. Headline CPI in April eased from 2.4% to 2.3%yr (vs 2.4%) and the core rate was steady at 2.8%yr (on consensus). Meanwhile, producer prices softened to 2.4% (vs 2.5%) from 2.7%yr, implying that pipeline price pressures were limited at this stage. On the consumer front, retail sales were soft in April after surging higher in March to front run tariffs. Retail sales slowed to a 0.1% rise in April from a 1.7% gain in March while the control group - a better gauge of the spending pulse - fell 0.2% from a 0.5% lift last time out. 

In the UK, economic growth in the March quarter came through 0.7%q/q and 1.3%Y/Y pace, slightly upbeat relative to expectations. Tariff-related distortions did appear to be evident: business investment (2.9%q/q) and exports (3.5%q/q) clocked their fastest quarterly rises in at least 2 years, accelerated activity indicative of tariff frontrunning. The sizeable tax hike on employers in April has not appeared to dent the labour market. Although the estimated unemployment rate ticked up from 4.4% to 4.5%, employment lifted by 112k over the past 3 months. Wage pressures have also cooled, easing to a 5.6%yr pace from 5.9% previously.  

Upside surprises in the latest data for wages growth and employment has not shifted markets from pricing in a 25bps RBA rate cut next week followed by two more cuts before year-end. Although well into the post-pandemic cycle, Australia's labour market continues to deliver robust outcomes. Wages growth firmed from 3.2% to a 3.4% annual pace in the March quarter (see here), while employment surged by 89k in April - its strongest rise in 14 months - keeping the unemployment rate low and steady at 4.1% as participation rebounded to a near record high of 67.1% (see here). Labour market strength could be used by the Board as justification to leave rates on hold, but the sense is that it will give more weight to the ongoing progress on the inflation side of its mandate. Core inflation returned to the 2-3% target band in the March quarter for the first time since 2021, a factor that should guide the Board towards continuing the process it started back in February of gradually loosening monetary policy. 

Australian employment 89k in April; unemployment rate 4.1%

Australia's unemployment rate remained at 4.1% in April as employment surged by 89k, a massive upside surprise on the 22.5k rise expected and the largest increase since February last year. An above consensus print on wages growth yesterday (0.9%q/q, 3.4%Y/Y) into today's strong labour market report drove a hawkish reaction in markets that were fully priced for an RBA rate cut next week. Given the February cut was a close call, next week's decision looks like it will also be close. But with core inflation returning to the 2-3% target band for the first time since 2021 and the labour market remaining solid, the case for a further winding back of policy restriction will likely win out. 

By the numbers | April

• Employment rocketed up by 89k in April (full time 59.5k/part time 29.5k), an outcome more than double the top side of the forecast range (15-40k) and around 4 times higher than the 22.5k consensus figure. An upward revision lifted the gain in March to 36.4k from 32.2k reported initially. 
• The unemployment rate was steady at 4.1%, as expected. But underemployment lifted from 5.9% to 6.0%, pushing up the total underutilisation rate from 9.9% to 10.1%, bringing both measures back to their levels at the start of the year. 
• Labour force participation rebounded to near record highs, lifting to 67.1% from 66.8% in the prior two months. 
• Hours worked were flat in April (1.1%yr) coming off back-to-back falls in February (-0.4%) and March (-0.3%).

The details | April

The volatility seen in employment outcomes through Q1 has extended into April. After the outcomes in February (-56.3k) and March (36.4k) missed to the downside of consensus, payback came in the form of a huge upside result of 89k in the latest month. Looking through the month-to-month swings - as the RBA will do - the overall picture is still consistent with a robust labour market. Employment has increased by around 104k since the end of last year, with gains averaging out at a decent pace of 26k per month.  

Encouragingly, the strength of employment in April held the unemployment rate at 4.1%, even as the participation rate returned to a near record high level of 67.1%. A wave of retirements saw participation fall earlier in the year, raising questions as to whether the peaks had passed. A combination of elevated participation and historically low unemployment remains a constructive one for the nation. Although the broader underemployment rate at 6% and total underutilisation at 10.1% drifted up in April, both remain materially below their respective levels in the soft pre-pandemic labour market.  

Monthly hours worked levelled out in April (0%) after falling by 0.7% across February-March - a decline partly driven by the disruptions from ex-tropical cyclone Alfred. In reality, the hours worked outcomes have been just as volatile as the employment ones. A surge in employment in April should logically have seen hours worked rise, but gains may show up in the coming months. 

In summary | April

Although the data have been volatile, the key take away is that Australia's labour market remains in robust shape. Peak levels of tightness have eased, and participation is back near record highs - consistent with the overall rebalancing of demand and supply the RBA has been wanting to see to indicate the labour market will not be a source of inflationary pressure. That is backed up by core inflation returning to the 2-3% band in the March quarter. The light remains green for the RBA to cut next week.