Macro (Re)View (6/11) | Midterms shift narrative

A shift in the US political landscape with the Democrats taking control of the Congress after the midterm elections had widespread ramifications across markets. Concerns over the pace of the data centre buildout weighed on equities, but renewed optimism around an end to the Gulf conflict saw brent crude oil fall almost 14% over the week. That supported lower Treasury yields, even though strong payrolls data on Friday revamped hawkish pricing for a Fed rate hike in December to around an 80% chance from around 50%. The USD rose modestly. The overall backdrop saw the AUD fall heavily, which also reflected revised expectations that the RBA's tightening cycle has reached the end of the line after this week's hike. 

US nonfarm payrolls surged by 165k in October - more than double the 70k consensus - lowering the unemployment rate from 4.2% to 4.1%. Backward revisions also boosted employment gains over August and September by 84k, accelerating the 3-month average for payrolls to a very strong 137k. 

The report showed employment growth in professional services (70k) and healthcare (42k) in October was well above their respective averages for the past 12 months. A much stronger-than-expected rise in job openings in September (7.5m) provided a supporting sign of the strength in labour demand. Average hourly earnings growth lifted from 3% to 3.1%yr; however, a rise in participation (61.9%), as well as continued strength in labour productivity (2.1%Y/Y in Q3), should keep any potential concerns from the Fed about wage pressures contained.   

The Bank of England hiked interest rates for the first time in more than 3 years, raising its key rate from 3.75% to 4%. While the decision was expected, support for hiking from all 9 members on the MPC - the vote was 8-1 with Cathrine Mann voting for a 50bps hike - came as a hawkish surprise. The more dovish members (Dhingra and Taylor) that were expected to remain resistant to hiking saw the move as an insurance hike in light of increased inflationary risks. 

In its latest Monetary Policy Report, the BoE materially lifted its inflation outlook due to energy prices rising more than previously anticipated. The BoE now sees headline inflation peaking close to 5% around the middle of next year, up an expectation of just 3.2% in late 2026 in the previous forecasts. At the post-meeting press conference, Governor Bailey said that while a prolonged tightening cycle was not warranted, unless inflationary pressures eased - essentially requiring the Gulf conflict to end - additional tightening was likely. Markets are pricing in a further 3 rate hikes over the next 12 months or so. 

In Australia, another 25bps rate hike from the RBA - its 5th this year - increased the cash rate to 4.85%. As discussed in my review of the meeting (see here), the RBA has once again had to raise its inflation outlook in its Statement on Monetary Policy, pushing out the timeline for inflation to return to target (2-3%) until mid 2028. A key message from Governor Bullock at the post-meeting press conference was that capacity pressures in the economy due to the strength of domestic demand are now judged to be more pressing than previously thought. 

The sense in markets is that the RBA will now go on pause as it waits for signs in the data to assess how its tightening cycle is impacting conditions. Cash rate futures attach a low probability (sub 30%) to any further hikes, and by the close on Friday the curve was close to fully pricing in a rate cut by the end of 2027. Domestic data reflected resilient demand, with an upside surprise for household spending in September (see here). Dwelling approvals advanced 5.1% (see here) and the trade surplus widened in September (see here), both beating expectations. 

Australia's trade surplus $2.8bn in September

Australia's trade surplus lifted modestly from $2.6bn to $2.8bn in September, its widest in 7 months, defying expectations to narrow to $1bn. Exports rose 2.3% in the month on the back of strength in the commodities complex, reaching their highest level since March 2023. That contrasted with a 3.3% fall in imports - their 3rd decline in the past 4 months - with the renewed pressures on global oil prices yet to impact fuel imports.    

 

The monthly trade account was in surplus by $2.8bn in September, with exports ($48.4bn) exceeding imports ($45.6bn). It averaged a surplus of $1.5bn over the past 3 months, while it was in surplus by $4.5bn over the quarter. Australia has seen its trade surpluses compress notably this year, and was in fact in deficit in March and May for the first time in around a decade. The AI-related investment boom has seen imports surge, while higher fuel prices due to the conflict in the Gulf have also played a role. However, exports hit back in the latest quarter to some degree rising by 2.6% to $141.7bn, outpacing a broadly flat result (0.2%) for imports ($137.2bn).  

In September, exports lifted by 3.3% to $48.4bn (10.4%yr). The key driver was non-rural goods (2.8%) as most of the major commodities (excluding coal -3.5%) saw gains: LNG 6.6%, metals 23.5%, and iron ore 2.3%. The chart below shows quarterly commodity exports, with LNG, or 'other mineral fuels' (pink line), ramping sharply of late on the back of the rise in global energy prices caused by the Gulf conflict. A 3.6%m/m rise in rural goods, driven by meat (11.3%), also supported the lift in exports.   

Monthly imports fell by 3.3% to $45.6bn but are still up by almost 12% since September last year. Aside from a large decline in volatile non-monetary gold (-34.7%), the overall weakness reflected falls in consumption (-2.2%) and capital goods (-2.5%). Car imports (-4%) weighed most on consumption goods, while capital goods - the category that has been boosted by the AI-related upswing - declined as aircraft orders pulled back (-33.7%) after recent gains. Intermediate goods were up modestly (0.9%) but are set to rise much more sharply on the back of the renewed rise in global oil prices, as they did earlier in the year after the conflict escalated. 

Australian household spending rises in September

Australian household spending rose by a stronger-than-expected 0.6% in September, rebounding from a weak month in August (-0.1%). Higher fuel prices boosted spending, while travel and leisure spending was also strong alongside the AFL and NRL finals series. Sales volumes increased at a solid pace (0.7%) over the quarter, reflecting the resilience of household demand; however, the RBA has effectively hiked rates twice since then, with its September hike coming on the final day of the month, followed by yesterday's rate rise (see here).  

Household spending increased by 0.6% month-on-month in September - well above the 0.2% rise that was expected - and 6.8% over the year. A downward revision adjusted the result in August from flat (0%) to a modest fall (-0.1%), after spending rose sharply in July (1%). 

Gains in the health (1.5%) and recreation and culture categories (0.8%) were the key factors behind the rebound in September. Health spending was supported by increased consultations as the flu season came late on. The AFL and NRL finals through September boosted spending on travel, gambling and electronic goods. Strong ticket sales for upcoming concerts were also a factor. 

Meanwhile, spending on fuel rose 5.4% in September as fuel prices reaccelerated due to the conflict in the Gulf continuing and with the fuel excise tax cut having ended in August. 

For the September quarter, volumes (or spending adjusted for inflation) increased by 0.7%, following similar sized gains in recent quarters. Volume growth increased from 2.5% to 3.2% year-on-year, its fastest pace since early 2023.  

Volume gains were broadly based in the September quarter, with transport (1.6%) and clothing and footwear (1.2%) leading the way. Hotels, cafes and restaurants fell very slightly (-0.1%), while alcohol and tobacco (-1.2%) continued to contract - though that is affected by underreporting due to the well documented rise in illicit tobacco sales.     

At yesterday's meeting, the RBA made a modest downgrade to its outlook for household consumption growth this year from 1.6% from 1.4%Y/Y. Risks are weighted heavily to the downside given the lagged effects from the RBA's 5 rate rises have yet to play through, while the housing market downturn is also showing no signs of slowing. 

RBA hikes cash rate by 25bps in November

The RBA hiked the cash rate by 25bps to 4.85% at today's meeting, the 5th time it has raised the key rate this year. Once again, the RBA lifted its inflation forecasts in the Statement on Monetary Policy, pushing back the expected return of inflation to the 2-3% target band from early to mid 2028. The major surprises were the 6-3 vote split from the Board and policy guidance that was watered down by removing the reference to 'increasing the cash rate target further'. The market reaction to those developments was notable. Pricing for another hike this cycle fell from around a 40% chance to 20%, the 3-year government bond yield declined 8bps to close at a 2-month low (4.77%), and the Australian dollar weakened.       

The themes that accompanied today's hike were consistent with the RBA's hawkish messaging going into the meeting around upside risks to inflation coming to fruition. Persistent conflict in the Gulf had kept oil prices elevated, with signs that was now spilling over to a broader range of prices. In addition, Governor Bullock at the post meeting press conference highlighted that capacity pressures in the domestic economy had been more significant than previously thought. 

The inflation outlook this year was lifted materially from 3.6% to 4.5% on a headline basis and from 3.3% to 3.6% in underlying terms. Both headline and underlying inflation is then expected to slow over 2027 to 2.7% and 2.9% respectively (both revised up from 2.6%), before eventually returning to the middle of the 2-3% target band in mid 2028, around 6 months later than previously forecast.   

Interest rates were already seen as restrictive ahead of today's meeting and this latest hike has made financial conditions a little tighter. The effect of restrictive policy is set to weigh on the growth outlook, which is expected to run at a below trend pace across the forecast horizon. Growth this year is now expected to be 1.6%, a little stronger than previously expected (1.4%); however, downward revisions were made to forecast growth in 2027 (1.3% from 1.6%) and 2028 (1.5% from 1.8%). 

As a result, the unemployment rate is now expected to rise more quickly and to reach a higher peak of 5.1% in 2028. If there are signs that this outlook for slower growth and a softer labour market is beginning to play out, markets will look to start pricing in rate cuts; however, they are not yet at that point. The next RBA meeting is on 7-8 December.

Preview: RBA November meeting

The RBA is widely expected to hike the cash rate by 25bps to 4.85% today (decision due at 1430). Hawkish RBA commentary and Q3's inflation report have combined to lift market pricing for a hike at this meeting to around an 80% chance, up from around 50% after the September meeting. Although the RBA has already hiked rates four times this year - a far more aggressive stance than the likes of the Fed and ECB - it is not yet ready to throw in the towel on its tightening cycle. The effects of the Gulf conflict and a robust domestic economy will see the RBA revise its inflation outlook up today, threatening a more prolonged return of inflation to the middle of the 2-3% target band, currently not forecast until early 2028.  

At the September meeting, the Monetary Policy Board returned a unanimous vote (9-0) to raise the cash rate by 25bps to 4.6%. The meeting minutes showed there was rising concern that elevated inflation could persist, with the conflict in the Gulf continuing to put upward pressure on energy prices and with robust demand testing the supply capacity of the domestic economy. In Q3, headline CPI was running at 3.9% year-on-year while the underlying or trimmed mean rate was 3.7% year-on-year (quarterly series). Those outcomes exceeded the RBA's year-end forecasts for 3.6% and 3.3% respectively, suggesting that its concerns over the inflation outlook may be materialising.  

While the labour market has shown some signs of faltering - the unemployment rate averaged 4.6% in Q3, a little higher than the trajectory forecast by the RBA - conditions are still broadly viewed as tight. However, it was formally noted in the meeting minutes that with inflation remaining elevated, the trade-off with the employment side of its mandate was worsening. This will be a key message for Governor Bullock to manage at today's press conference. As will the slowdown in the housing market amid another rate rise.     

Australian dwelling approvals rise 5.1% in September

Australian dwelling approvals outperformed expectations rising by 5.1% in September, well above the 2% rise forecast. However, the result was driven entirely by a surge in higher-density approvals (24.6%), hiding a large fall in house approvals (-5.3%). Approvals have trended higher over the past 2-3 years but could now be peaking given the prevailing headwinds to housing construction. 

Dwelling approvals rose 5.1% in September to 17.9k, their largest gain since June. However, that followed back-to-back falls in July (-1.7%) and August (-5.2%), leaving approvals flat over the quarter (53.1k). An influx of unit approvals (24.6%), which are volatile, drove the headline gain in September after high-rise approvals in Sydney and Brisbane surged. The underlying data showed high-rise approvals turned in their second strongest result in the past four years. Despite this, unit approvals still declined in the quarter (-1%). House or detached approvals fell 5.3% in September, their weakest result in more than a year, though they managed to scratch out a gain in Q3 (0.7%).  

Given the 4 interest rate rises already delivered by the RBA this year, and a 5th expected tomorrow, this could well be the top for approvals in this cycle. Other headwinds are also a factor. Cotality this morning reported that national housing prices continued to slide in October, bringing the correction to almost 7%. Last week, the ABS highlighted that soft demand is seeing developers increase incentives, while cost increases are also putting pressures on margins. 

Macro (Re)View (30/10) | Fed and ECB on hold; RBA to hike

Despite a strong start, US equities ended up lower this week, with the reversal sparked by the same concerns around the returns from massive AI-related investment that have gripped the market for months. The USD rose modestly (0.2%) and the Treasury curve was a little steeper. In a raft of central bank meetings, the Fed, ECB, BoJ, and, in a surprise decision, the RBNZ all left rates unchanged. The BoC hiked by 25bps, and the RBA is expected to follow suit next week.  

In the US, the Fed left rates unchanged in the 3.75-4% range. While the decision was expected and supported by a large majority of FOMC voters (10-2), broader uncertainty over the Fed's reaction function persists. In every sense, the Fed's messaging is hawkish given inflation remains 'elevated' to its 2% target - data this week showed its preferred core PCE deflator was running at 3.1%yr in September - but the statement said the FOMC opted to wait for 'the accumulation of more information' rather than hiking this week. 

This was despite its assessment of economic activity being upgraded from 'solid' to 'strong' as GDP growth accelerated in Q3 by 0.8%q/q and 2.1%Y/Y on the back of surging AI-related spending and resilient household demand. Chair Warsh provided little insight at the post-meeting press conference, emphasising the tightening in conditions following the September rate hike as evidence of its commitment to the inflation target. Warsh also announced a change to the policy schedule from next year. A vote on rates will be removed from one of the 8 meetings in 2027 (and then two in 2028) to allow the FOMC to focus entirely on strategy deliberations.  

The ECB left its key rates on hold this week. Growth in the euro area remains resilient, GDP in the September quarter rose by a stronger-than-expected 0.4%q/q and 1.3%Y/Y, though the ECB said that downside risks remain. But upside risks to inflation remain the more prominent concern, with post-meeting reporting quoting ECB sources indicating that a rate hike in December is likely. News of President Lagarde's early departure from the ECB in February, nine months before the end of her tenure, overshadowed the press conference. From a market perspective, the largest impact from the UK autumn budget played out in equities after increases in taxes on banks were smaller than expected.   

Pricing for an RBA rate hike next Tuesday rose from around 60% to above 80% this week on the back of hawkish RBA commentary and elevated inflation data for September. Whether it was chief economist Hunter's 60 Minutes appearance or the Senate testimony from the bank's top officials, the key message was that the inflation outlook had worsened recently, requiring more work to bring inflation back to the 2-3% target. Higher fuel and holiday travel costs were key drivers of headline CPI lifting by 1.3% in the September quarter and 3.9% over the year; however, a strong increase in the trimmed mean - the RBA's preferred measure - of 1% quarter-on-quarter and 3.7% year-on-year indicates that price pressures are broadly based (see here). 

Australian CPI 4.3% in September

Australian inflation continued to increase in September, with markets now pricing in around a 90% chance of a 25bps RBA rate hike next week, up from 67% yesterday. The RBA has already increased the cash rate from 3.6% to 4.6% this year after inflation turned for the worse moving further above the 2-3% target band. Today's report showed headline inflation increased by 3.9% over the year to the September quarter (unchanged from the June quarter), while the monthly data series clocked the increase at 4.3%, up from 4% previously. The RBA's preferred trimmed mean measure, which excludes the most volatile price changes, lifted from 3.6% to 3.7% in the quarterly data and rose from 3.5% to 3.6% in the monthly series, outpacing the central bank's earlier forecasts.      

Headline inflation (tracking all price changes across the CPI basket) increased by 0.8% in September and 1.3% in the quarter. Those outcomes were a little stronger than expected. Fuel prices were a major factor, up a further 9.4% in September to be 35% higher over the past 3 months. That reflects the unwinding of the federal excise tax cut as well as renewed tensions in the Gulf pushing global oil prices up again. 

Domestically, holiday travel costs picked up sharply (8%m/m) in September, responding to strong demand during the school holiday period that also coincided with the AFL and NRL finals series. International travel also saw a strong rise (7.2%m/m). 

Over the past year, housing-related costs have been the major driver of inflation rising by 5.2%; however, that pace has slowed materially since the start of 2026. The significant slowdown in the established housing market may be starting to weigh on housing construction costs, which have eased to a 4.7%yr pace from almost 6% a few months ago. Meanwhile, electricity prices have risen 12.8%yr but were increasing much more rapidly earlier this year after government rebates had ended.  

 

Preview: Australian Q3 CPI

Australia's latest inflation report is due today (1130 AEDT), less than a week before the next RBA meeting. Expectations for a 25bps rate hike at that meeting have built rapidly over recent days to a 2-in-3 chance, after senior RBA officials Hauser and Hunter indicated the tightening cycle has further with inflation remaining well above the 2-3% target band. Today's report includes the monthly and quarterly inflation figures for September.  

A recap: Inflation pressures remain elevated  

Despite softer readings for the month of August, annual inflation continued to remain elevated to the RBA's target band. Headline CPI slowed to 0.4% month-on-month after rising by 1% in July, while trimmed mean (or core) CPI posted its weakest increase (0.2%m/m) since March. However, annual inflation still lifted from 3.5% to 4% in headline terms and the core rate printed at an unchanged 3.6%. Over the past year, housing has been the major driver of inflation. That reflects cost increases associated with dwelling construction, electricity prices re-setting after government subsidies, and rising rents.  

 

The last set of quarterly figures were for the June quarter published back in July. In that release, headline inflation moderated to a 0.6% quarter-on-quarter rise, well down from the 1.4% surge in the March quarter. However, the year-on-year pace only eased modestly from 4.1% to 3.9%. Meanwhile, trimmed mean CPI came in at 0.8%q/q, unchanged from the March quarter, but ticked up from 3.5% to 3.6% year-on-year.   

September preview: Upward pressure on inflation as fuel excise tax cut ends   

Today's release sees the monthly and quarterly inflation figures for September published. The RBA places greater weight on the quarterly series because the transition to monthly CPI reports in Australia is only in its infancy. The outcomes expected are:

• Headline CPI: 0.6% month-on-month (range: 0.3-0.8%) and 1.3% quarter-on-quarter (range: 0.6-1.4%)

• Trimmed mean CPI: 0.3% month-on-month (range: 0.2-0.4%) and 1% quarter-on-quarter (range: 0.9-1%)

If those outcomes are realised, annual headline CPI would lift from 4% to 4.1% in the monthly series but hold steady at 3.9% in the quarterly figures. Trimmed mean CPI is set to hold at a 3.6% annual pace across both series. Comments in the past week from the RBA's Hauser and Hunter have steered markets towards a rate rise next Tuesday. Hauser in particular noted the inflation outlook was 'materially worse' than in August when the RBA forecast headline CPI would be at 3.6% and the trimmed mean at 3.3% by year-end.  

A key dynamic over the quarter and in September was fuel prices putting upward pressure on inflation. The federal excise tax cut ended by early August, while renewed conflict in the Gulf continued to disrupt oil supply. Those effects saw fuel prices in the monthly CPI rise by 7.5% in July and 14.8% in August. 

Macro (Re)View (16/10) | US bonds rally

Concerns over AI-related financing led to heavy declines in US and Asian equities this week. In turn, US Treasuries received a solid bid - the 10-year yield recorded its largest week decline since February this year and the 2-year segment also fell (-8bps) - despite continued inflationary pressures after Fed Chair Warsh speaking at the IMF meetings indicated there was no urgency for further hikes. Fed pricing implies only around a 15% chance of a rate hike later this month. That may have weighed on the US dollar, which fell around 0.4% for the week despite the broader risk averse tone.    

US inflation data matched expectations in headline terms but was stronger than forecast on a core basis, reflecting broad-based price increases. Headline CPI lifted 0.6%m/m and 3.7% over the year to September, up from 3.4%; however, core CPI firmed to 0.3%m/m and 2.6%yr (from 2.4%). While energy prices surged (5.2%m/m), increases across core goods (0.3%) and services (0.4%) confirmed a wide range of the basket drove the result. Additionally, producer prices lifted 1.3% in the month, well above expectations (0.5%), pointing to further inflationary pressures in the pipeline.  

The minutes of the RBA's September meeting gave further context to the Board's decision to raise the cash rate by 25bps to 4.6%, its fourth rate hike this year. Upside risks to inflation were judged to have 'materialised or were building', with global cost pressures from higher oil prices and the AI-related boom coming on top of existing domestic capacity constraints. The Board was also mindful that with markets offshore pricing in tighter policy, financial conditions at home could ease via a weaker exchange rate if it failed to move. 

On the labour market, the prevailing view was the conditions were broadly consistent with its full employment mandate; however, data this week brings that into question. Employment fell by around 39k in September, a sharp downside surprise on the 20k consensus figure (see here). Although there is some uncertainty around the data given recent survey changes, the unemployment rate now stands at 4.7% - its highest since late 2021 - while it averaged 4.6% in the September quarter, already above the RBA's year-end forecast (4.5%). Markets have priced out expectations for another rate hike this year to just a 1 in 3 chance but still see another hike coming in 2027 to conclude the tightening cycle. 

Australian employment -39.3k in September; unemployment rate 4.7%

Australia's unemployment rate reached new highs since 2021, arguably placing the RBA's tightening cycle at a crossroads. Employment fell by around 39k in September - a significant downside surprise on the expected 20k increase - while the unemployment rate printed at 4.7%, steady after an upward revision in August (4.6%) but on track to exceed the RBA's year-end forecast (4.5%). Recent survey and methodology changes to the data may have impacted September's figures; however, the RBA has already delivered one of the more aggressive tightening cycles in advanced economies this year raising the cash rate by 100bps to 4.6%. Pricing for one further rate hike this year was cut from around 50% to 15% on today's release.      

Employment nationally fell by 39.3k in September, after a large decline in part time employment (-73.7k) was only partially offset by a lift in the full time segment (34.4k). Markets went into the report with a notional forecast for a 20k rise in headline employment. Recent employment outcomes have been volatile as the ABS has been gradually implementing changes to the series. While that process is now complete, the Bureau noted that today's report may have been impacted by the lingering effects of those adjustments but would only become clear in the course of future releases. 

On the data to hand, this was the weakest month for employment since the decline in April (-41.2k). There were also backward revisions made to July (now -17.1k from -15.9k) and August (29.3k from 39.5k) that reduced employment by 11.4k compared to previous levels. On the back of this, the 3-month average change in employment swung to -9k from a respectable 29.5k in August. Across the quarter, employment fell by 27.1k or 0.2%. The last time employment saw a comparably weak period was the March quarter of last year (-11.6k or -0.1%). 

In September, the unemployment rate was 4.7%. The last time it was higher than this was October 2021 (5.2%) when the pandemic was still impacting the labour market. This particular increase will certainly be seen in a different light given it came alongside declines in employment and in the participation rate, which fell from 67% to 66.8%. While the unemployment rate is now well up from cycle lows in late 2022, employment has continued to increase, allowing the RBA to hold onto its view that the labour market remains tight. Nonetheless, unemployment averaged 4.6% in the latest quarter and is tracking on a slightly higher path than the RBA's year-end forecast (4.5%). In other news, the broader underemployment rate increased from 6.2% to 6.3%, lifting total underutlisation to 11%, its loosest since November 2021.      

Hours worked were broadly flat rising by just 0.1% in the month (1.3%yr), slowing from a 0.7% increase in August. Following the decline in July (-0.7%), hours worked contracted by 0.4% in the quarter, a weaker outcome than for employment to round out a poor report.     

Preview: Labour Force Survey — September

Australia's Labour Force Survey for September is due today (1130 AEDT). The report returns to its usual slot on the third Thursday of the month, after recent releases were delayed while the ABS overhauled the series. A strong upside surprise for employment (39.5k) in August was unable to prevent the unemployment rate rising to 4.6%, its highest since late 2021. While acknowledging that conditions have eased, the RBA still regards the labour market as a little tight and broadly consistent with its full employment objective. Expectations are that employment will rise by 20k in September, holding the unemployment rate at 4.6%. Pricing for one further RBA hike this year sits below 50% going into this report. 

September preview: Markets on watch as ABS completes survey overhaul  

Markets are sitting on the fence, forecasting employment to increase by 20k (range: 0-35k) and the unemployment rate to remain at 4.6% (range: 4.5-4.7%). This is an understandable position given the usual volatility in the series while also considering that the ABS is rolling out the report for the first time since completing the overhaul of the survey's collection methods and questionnaire. The ABS has been working up to this point after gradually implementing these changes over recent months - though the methodologies used to generate the headline employment and unemployment figures remain the same.     

  

August recap: Unemployment rate rises despite solid employment growth

The unemployment rate touched fresh highs since late 2021 after rising to 4.6% in August from 4.5% in July. That came despite employment increasing by a net 39.5k in the month (part time 45.8k/full time -6.3k), nearly double the consensus forecast (20k) and a strong rebound from July's surprise 15.9k decline. For the 3 months to August, employment gains averaged 34k per month, the strongest momentum since February.    

Even with the fairly strong employment outcome, it was not enough to outpace the increase in the labour force (67.7k) as the participation rate rose from 66.9% to 67.1%. That saw the unemployment rate rise from 4.5% to 4.6%. However, the broader underemployment rate declined from 6.3% to 6.2% as hours worked (0.8%m/m) posted their fastest rise in almost a year. That held total labour underutilisation to an unchanged 10.8%.  

Macro (Re)View (9/10) | Treasury market finds relief

Markets found some relief from the relentless rise in longer duration yields as the benchmark 10-year Treasury yield saw its first weekly decline since late August. Treasury Secretary Bessent sought to downplay concerns around higher yields, while solid demand at 10- and 30-year bond auctions during the week was also important. US equity markets posted gains and the risk sensitive AUD picked up ground against the US dollar - though the DXY index still lifted for the week given the high weighting of the euro, which continues to remain weak amid France's fiscal concerns.  

Market pricing for an October Fed rate hike remains low, sitting around 20% after falling from around 70% on the back of last week's softer-than-expected US labour market and inflation data. That was reinforced by this week's comments from Governor Waller that highlighted flexibility around the timing of rate hikes following September's 25bps increase. The minutes from that meeting were hawkish, reflecting not only the unanimous vote for the rate hike but also significant support for additional tightening this year, but that failed shift markets. However, next week's CPI report shapes as a risk event that could fuel a hawkish repricing. 

In the euro area, the impact of France's fiscal concerns continues to see elevated bond yields tightening financial conditions, effectively taking ECB hiking prospects off the table in the near term. Market discussion of how the ECB might respond centres on three courses of action: the ECB walking back its hawkish narrative; ending quantitative tightening and also reinvesting proceeds from maturing bonds; and (least likely) calling upon its Transmission Protection Instrument to close spreads. The account of the meeting back in September was released this week, outlining that upward revisions to the inflation outlook in 2027 and 2028 prompted the ECB to hike by 25bps.    

Focus in Australia turns to next week's labour market report, while the minutes of the RBA's September meeting where it hiked the cash rate by 25bps to 4.6% will also be of interest. The labour market is expected to have increased employment by 20k in September, a step down from August's rise (39.5k) but enough to keep the unemployment steady at 4.6%. A key point to watch in the minutes will be how the RBA reflects on the restrictiveness of the cash rate after this latest hike. Pricing for one further RBA hike before year-end has declined to 38% from around a 50/50 chance following the September meeting.

Macro (Re)View (2/10) | Long-End Pressure Persists

Opposing tensions in global bond markets made for a volatile week, giving renewed strength to the safe-haven US dollar, sending the DXY index to year-to-date highs. Key US data on inflation and the labour market came in weaker than expected, while influential New York Fed President John Williams indicated there was no urgency for another rate rise. That cut market odds for a Fed October rate hike sharply - falling from 70% to 15% - sparking a rally at the front end of the Treasury curve. Declining oil prices also played a role, driven not by diplomatic breakthroughs buy by increased supply through the Gulf and Europe's reserve releases. Pressure remained firmly on long-duration yields. US 10- and 30-year yields pressed new highs since 2002 amid ongoing supply and deficit concerns. That was particularly evident in Europe where plans from the government in France to reduce borrowing failed to inspire confidence. The spread between 10-year French and German bonds hit its widest since the 2011 debt crisis.         

In the US, the Fed's benchmark inflation measure slowed from 3.3% to 3%yr in August - still well above target (2%) but printing below expectations to remain unchanged. Meanwhile, the labour market also underwhelmed as nonfarm payrolls rose by just 29k in August, a downside miss on the 90k consensus as revisions reduced employment by 60k in the prior two months. That saw the unemployment rate push back up to 4.2% after spending July and August at 4.1%; however an uplift in the participation rate (61.8%), a 4-month high, was a factor. Rounding out the report, wages growth was modest (3%yr), indicating inflationary pressures from the labour market remain subdued. 

Higher energy prices saw inflation in the euro area lift from 3.2% to 3.8%yr in September, a 3-year high. Despite this, markets see only around a 10% chance of an ECB rate hike later this month, influenced by widening bond spreads - though pricing still points to a better than 50/50 chance of another 25bps increase before year-end. ECB President Largarde, said the central bank remained focused on guarding against second-round effects on inflation from higher energy prices but needed to be mindful of the impacts on growth from tighter policy. 

Domestically, the RBA increased the cash rate by 25bps to 4.6% this week - its fourth rate hike of the year (see here). The Monetary Policy Board remains open to raising the cash rate further after retaining its guidance in the decision statement. Inflation data was elevated in August (see here) showing headline CPI lifted from 3.5% to 4%yr and core CPI holding at 3.6%, suggesting all upcoming meetings are live. However, markets think the RBA will now move to wait-and-see mode after effectively pulling forward the rate hike that was previously expected next month to this week. The post-meeting press conference from Governor Bullock shaped that view, with market pricing for another hike this year falling below 50%.