Macro (Re)view (24/10) | US CPI no barrier to Fed cut

Major equity markets swung from gains to losses but ended the week higher across the globe. A US CPI report that delivered cooler-than-expected outcomes paves the way for the 25bps rate cut the Fed have guided markets towards at next week's meeting to address labour market concerns. The Bank of Canada is also expected to cut by 25bps next week, but the ECB's meeting should deliver little excitement. In Australia, the long awaited Q3 CPI report is due, a key input with pricing slightly favouring a November RBA cut.  

A temporary reprieve to the data void in the US due to the government shutdown saw the September CPI report released - data the government required for adjustments to social security payments. Headline and core CPI came in at 3%yr - cooler-than-expected outcomes relative to the 3.1% consensus for both measures - with headline up from a prior pace of 2.9%yr in August and the core rate slowing from 3.1%yr. The report broadly confirmed that tariff-related price effects remained limited; core goods CPI was 1.5%yr, well up from its lows but still significantly slower than the pace of core services inflation at 3.2%yr. 

A cooler-than-expected inflation report extended the rally in the UK gilt market - sparked initially by softness in last week's labour market data - sending the 2- and 10-year segments on the curve to lows since August and December 2024 respectively. Although a BoE rate cut is widely seen to be out of the question until the government tables its Autumn Budget in late November, pricing has now pushed further towards the current easing cycle requiring an additional 3 rate cuts. This came as headline CPI was unchanged at 3.8%yr in September and the core rate eased from 3.6% to 3.5%yr - outcomes that defied expectations to rise to 4% on headline and 3.7% for the core rate. Food inflation falling 0.2% month-on-month was key to the downside surprise on headline inflation. Meanwhile, services inflation held at a 4.7%yr, a pace 0.1ppt below market expectations and a 0.3ppt undershoot on the BoE's forecasts. 

In Europe, a rise in the composite gauge of economic activity (incorporating the services and manufacturing sectors) to a 17-month high in October (52.2) only supports expectations that the ECB will extend its pause on rate cuts at next week's meeting, maintaining that policy is 'in a good place'. With the economy continuing to show resilience amid trade and geopolitical uncertainty, and inflation sitting near the 2% target, the ECB will reaffirm that policy decisions remain data dependent. That means a December rate cut cannot be ruled out, though it would require the upcoming GDP growth and inflation data to take a turn for the worse. 

Australia's deal with the US on rare earths was the main event of note in an otherwise quiet week domestically. The focus is very much on next week's Q3 CPI report where headline CPI is expected to pick up from 2.1% to 3%Y/Y and the trimmed mean is forecast to hold its 2.7%Y/Y pace. The RBA has flagged upside risks to the report for some time - its current forecasts are for headline to end 2025 at 3% headline and 2.6% trimmed mean - which if materialised could delay further rate cuts, despite market pricing for a November cut building following weakness in recent labour market reports. 

Macro (Re)view (17/10) | November cut back on table for RBA

Equities mostly advanced over the week, though sentiment was shaky amid continued uncertainty over US-China trade. Concerns over US regional banks also emerged, but earnings results from the major institutions were strong. In France, PM Lecornu survived two no-confidence votes, easing pressure on the government for now. A weak labour force report in Australia saw bond yields decline significantly, the 10-year segment falling to lows since April as markets now eye an RBA rate cut in November.  

The RBA's caution on further rate cuts is set to be tested after Australia's unemployment rate unexpectedly spiked to a 4-year high in September. Employment rose by 14.5k but disappointed expectations (20k) for the 4th time in the past 5 months, and with the participation rate rebounding to a near record high 67%, the unemployment rate printed at 4.5% from an upwardly revised 4.3% in August (reviewed in full here). Markets repriced sharply on the figure, with the implied probability of a 25bps cut in November surging from 35% to 80%. The prevailing message from the RBA - reiterated this week in the September meeting minutes and in speeches by Assistant Governors Hunter and Kent - has essentially been that policy is well placed, achieving both of the Board's policy objectives for 2-3% inflation and full employment.

Progress on the inflation side of the dual mandate has been the driving factor behind the RBA's 3 rate cuts since the start of the year. With the RBA highlighting upside risks to inflation in the upcoming CPI report for Q3 (due October 29), it has stuck to a cautionary tone on prospects for further easing. But with risks around the labour market rising, the Board is likely to start giving greater focus to the employment side of its mandate. Such a pivot would pave the way for a November cut. 

In the US, the Fed's Beige Book for October reported that activity in 9 of the 12 districts was either flat to slightly weaker, with the high level of uncertainty around the economic outlook being a key factor. In the absence of top-tier data amid the ongoing government shutdown, those themes broadly aligned with market pricing for 2 Fed rate cuts by year-end. That is the baseline outlook that markets hold, as the host of officials from the Fed that spoke publicly this week stuck to their previously expressed views on the appropriate course for policy.

Comments from BoE Chief Economist Pill indicated that the easing cycle in the UK could be set to slow; however, soft labour market data suggests it has further to run. Private sector wage growth eased more than expected to a 4.4%yr pace from 4.7% previously, as the unemployment rate indicator lifted from 4.7% to 4.8% - its highest since mid-2021. Meanwhile, payrolled employment fell by 10k, posting its 8th consecutive contraction.

Australian employment 14.9k in September; unemployment rate 4.5%

A shock rise in Australia's unemployment rate to 4.5% in September - well above expectations to its highest since late 2021 - has put an RBA rate cut in November firmly back on the table. Market pricing for a 25bps cut on Melbourne Cup day surged to above 80% on today's data, only a day after the odds had lengthened below 50% following cautious comments from the bank's chief economist. While the RBA may be less concerned by the rise in unemployment than markets given employment is still rising, it seems only a matter of time until the RBA makes a similar pivot to the Fed in focusing more on the full employment side of its dual mandate than inflation. 

By the numbers | September 

• Employment lifted by 14.9k in September, below the 20k rise expected and the 4th downside surprise in the past 5 months. The initially reported 5.4k decline in August was revised to a larger fall of 11.9k. 
• National unemployment rose to 4.5% from an upwardly revised 4.3% in August (from 4.2%). With underemployment increasing from 5.7% to 5.9%, total labour force underutilisation lifted from 10% to 10.4%. 
• Labour force participation rebounded to 67% in September after falling to a 5-month low in August (66.8%). The employment to population ratio held steady at 64%. 
• Hours worked increased by 0.5% month-on-month, reversing a 0.4% fall in August. But total hours worked in Q3 only maintained their level from Q2. 

The details | September

Australia's unemployment rate broke out to 4.5% in September - its highest level since the pandemic-affected conditions of late 2021 - succumbing to the recent softness in employment growth. Although employment rose in September by 14.9k (8.7k full time/6.3k part time), it was far outpaced by growth in the labour force of 48.9k, reflected in the participation rate rising from 66.9% to 67% - just below cycle highs. Meanwhile, the employment to population ratio - the share of working aged Australians with a job - has ebbed from its peaks but is still very elevated at 64%.  

The dynamic of subdued employment not matching growth in the labour force is pushing the unemployment rate up - not people losing jobs. Headline unemployment averaged 4.3% in the September quarter, up 4% in the final quarter of last year, while the cycle low was 3.5% in the back half of 2022. The RBA in August forecast unemployment would reach its current level by year-end. In a historical context, unemployment is still low for Australia, around its lows on the eve of the global financial crisis back in 2008/09. The broader underemployment rate stands at 5.9% and total underutilsation is 10.4% - both increased in September but are still lower than they were around 12 months ago. 

Hours worked (0.5%) recorded their strongest result since May, firming annual growth from 1% to 1.4%. But the story is less encouraging for the quarter, after hours worked rose 0.3% in July but then fell 0.4% in August. Overall, this left hours worked flat in Q3 compared to Q2, a weak signal for quarterly GDP growth. 

In summary | September    

A strong reaction to today's print has a November rate cut firmly back in calculations. The upcoming CPI inflation data for Q3 (due October 29) is still key, a report the RBA has flagged upside risks around. If materialised, that could well put the brakes on a November cut; however, risks are also now rising around the labour market.

Preview: Labour Force Survey — September

Today's Labour Force Survey (due 1130 AEDT) is expected to report Australian employment rebounded by 20k in September from its shock 5.4k decline in August; however, the national unemployment rate is still forecast to rise from 4.2% to 4.3%. While the labour market has softened, the RBA's 75bps of rate cuts since the start of the year has been driven by inflation returning to the 2-3% target range. This week's communications have reinforced that the RBA continues to see conditions in the labour market as tight. Barring a significant surprise today, the upcoming Q3 inflation report (29 October) will ultimately determine the outcome of the RBA's November meeting, which markets currently see as a line-ball call between a hold or 25bps cut. 

September preview: Unemployment expected to tick higher

The national unemployment rate is forecast to rise to 4.3% in September (range: 4.2-4.4%) after holding at 4.2% through July and August. Expectations for a higher unemployment rate come with employment forecast to rise by 20k on the median estimate (range: 10-35k). Despite expectations, if employment does indeed rebound from August's weak result (-5.4k), the unemployment rate could conceivably decline. Much will depend on whether the participation rate (currently 66.8%) sees any movement.  

August recap: Employment falls short again 

Employment unexpectedly declined by 5.4k in August against a consensus forecast of 21k, the 3rd downside surprise in the past 4 months. July's initially reported increase of 24.5k was revised up to 26.5k. Volatility continued in the underlying composition, with full time employment falling by 40.9k and part time employment rising by 35.5k - a complete reversal to July's profile (FT 63.6k, PT -37.1k). 

Despite the fall in employment, the unemployment rate held steady at 4.2%. However, there was a caveat to this as the participation rate slipped from 67% to 66.8%, its lowest level since March. The broader underemployment rate declined from 5.8% to 5.7%, a somewhat surprising outcome given hours worked contracted in August. With unemployment flat and underemployment falling, the total labour force underutilisation rate - the most comprehensive measure of labour market tightness - fell back to single digits in August at 9.9% from 10.1% in July, marking a low since March. 

As alluded to above, hours worked weakened in August falling by 0.4% month-on-month, more than reversing July's increase (0.3%). Annual growth halved to 1% from 2.1% in July. Hours worked in the full time segment declined by 0.9%m/m, weakening by significantly more than the fall in employment (-0.4%). By contrast, part time hours accelerated by 1.8%m/m even though employment only increased by 0.8%.   

Macro (Re)view (10/10) | Tariff turmoil strikes again

President Trump's threat to impose a 100% duty on Chinese imports 'over and above' existing tariffs from November 1 has renewed the trade war going into a long weekend in the US. Equities tanked in the US on Friday following Trump's announcement, which comes in retaliation to China tightening controls on exports of rare earths, inputs used to manufacture electronic goods. Meanwhile, the US government shutdown continues, leaving key data on hold; however, reports indicate that the BLS will publish the September CPI report on October 24. In addition to political uncertainty in Japan and France, risk aversion continues to see gold surge while the US dollar strengthened sharply (1.2%) this week, despite bond yields falling across the curve. Closer to home, the RBNZ cut rates by 50bps in a dovish surprise to expectations for a 25bps reduction. 

Attention in the US remains firmly on the outlook for Fed policy. Having recommenced their easing cycle with a 25bps cut last month, the meeting minutes reaffirmed that the FOMC is on track to keep taking rates lower. Increasing concerns around the labour market have prompted this shift, though the minutes noted that upside risks to inflation 'remained elevated' on the expectation that tariff-driven price rises had yet to fully come to fruition. The degree of easing that is appropriate in the circumstances comes down to a judgement call, with FOMC members in public commentary, including Miran and Williams this week, outlining their varying views on the matter. Market pricing implies 2 (possibly 3) rate cuts will be forthcoming by year-end. 

The account of the ECB's September meeting reaffirmed that the Governing Council views policy is well calibrated and unlikely to change in the near term. Amid the ongoing uncertainty around trade and geopolitics, the ECB sees keeping a steady hand as the appropriate way forward. The ECB projects economic growth of 1.2% this year, 1% in 2026 and 1.3% in 2027; however, downside risks to that baseline outlook are prominent, and the strength of the euro is also a factor that could weigh on the bloc.      

In Australia, RBA Governor Bullock told a Senate committee that the central bank was well placed with inflation inside the 2-3% target band and the labour market still in solid shape. The RBA is taking more of a reactionary approach having already cut rates by 75bps this year. Governor Bullock once again stressed the importance of upcoming data to the rates outlook. Next week sees the September labour force data come to hand, while the quarterly inflation report due at the end of the month remains key. Since the RBA last cut in August, pricing for the next cut has pushed back progressively from November to February 2026. This tempering of expectations appears to be weighing on consumer sentiment, which the Westpac-MI index had falling 3.5% in October on the back of a 3.1% decline in September.

Macro (Re)view (3/10) | Markets brush off shutdown concerns

Market sentiment remained upbeat despite the US government shutdown, which delayed the key nonfarm payrolls report for September. The availability of other data releases, including the next CPI report, is now uncertain. However, data issues aside, expectations are set firm that the Fed will cut rates once - if not twice - by year-end. The shutdown is also widely view as activity delayed not forgone, while markets are also sanguine due to the Atlanta Fed's estimate for Q3 GDP growth tracking at a robust 3.8% annualised pace. 

A hawkish hold from the RBA this week kept the cash rate at 3.6% in a unanimous 9-0 decision. The recent run of stronger inflation and consumption data has seen the Board's tone turn more hawkish since its previous meeting in August. Over this period, market pricing for the next 25bps rate cut has been pushed back from November into early 2026. A more cautious tone appeared to be communicated by the Board on this occasion as the recovery in private demand was tracking ahead of expectations, inflation was showing signs of persistence in some areas, and the labour market was holding steady (reviewed here). 

At the post-meeting press conference, Governor Bullock noted that wealth effects, including from housing prices that were up a further 0.8% nationally in September, were supporting consumption, while the full impact of the RBA's 75bps of easing had yet to play through. Amid ongoing uncertainty around the global economy, Governor Bullock put the emphasis on the incoming data, notably the quarterly inflation report for Q3, and the RBA's next round of forecasts due for the November meeting as key to its reaction function. The RBA also published its semi-annual Financial Stability Review this week. One theme identified was that macroprudential policy could be called upon if risks in the housing market from the RBA's easing cycle were to build.

The Australian data to hand this week showed the recovery in consumption had cooled a bit with household spending rising by just 0.1% in August (5%yr), below expectations (0.3%) after a downwardly revised increase in July (0.4%) (reviewed here). Strength in services categories (0.5%) kept spending above water, as goods consumption declined (-0.2%). Volatility in global trade flows crunched Australia's surplus on goods trade from $6.6bn to just $1.8bn in August, its lowest level since 2018 (reviewed here). Exports saw their sharpest fall in 3 years (-7.8%) as non-monetary gold exports halved from record highs in July. A 3.2% rise in imports, boosted by consumption goods (5.8%), accentuated the deterioration in the surplus.

In the US, the absence of the September payrolls report put the focus on alternative labour market measures and the JOLTS data from earlier in the week. This, however, provided contrasting reads on conditions; employment contracted according to the ADP data by 32k in September, while the employment component of the ISM services index (47.2) posted its 4th straight reading in contractionary territory in September. By contrast, the Ravelio series estimated employment rose by 60.1k in September. Meanwhile, the Chicago Fed estimated the unemployment rate would have come in at 4.3% for September, unchanged from August. The hard data on the labour market from the JOLTS report showed that job openings job were higher than expected in August (7.227mn), while layoffs (1.725mn) were also less bearish than feared.     

The euro area rates outlook remains unchanged, with the ECB set to stay on pause following the latest inflation data. Energy prices drove headline inflation up slightly from 2% to 2.2%yr in September and the core rate remained at 2.3%, both measures in line with expectations. In a speech this week, ECB President Lagarde said inflation risks 'appear quite contained in both directions'. Meanwhile, unemployment in the bloc remains around historic lows but ticked up from 6.2% to 6.3% in August. Over in the UK, June quarter GDP growth slowed to 0.3% (as expected) from a 0.7% pace in the March quarter. The upcoming Autumn Budget (26 November) remains the key focus for markets.  

Australian household spending rises modestly in August

Australian household spending rose by a very modest 0.1% in August, below expectations for a 0.3% increase. Annual growth eased from 5.3% to 5%. At Tuesday's RBA meeting, Governor Bullock cited the recovery in household spending as a factor in the decision to leave the cash rate on hold. Wealth effects from increasing asset prices, rising real incomes and 75bps of RBA rate cuts were all supporting household spending according to Governor Bullock. Improving sentiment is likely to also be a contributing factor.     

Household spending rose for the 4th straight month lifting by 0.1% in August. This followed earlier gains in this run of 0.4% in July (revised from 0.5%), 0.5% in June and 1% in May. The headline increase in spending for August was underpinned by areas including transport (0.8%) and hotels, cafes and restaurants (0.3%), helping to offset declines in recreation and culture (-0.9%) and alcoholic beverages (-0.9%).  

Taking a broader perspective, growth in household spending continues to be weighted towards services over goods. Services spending lifted a further 0.5% in August to be up 8.1% over the year. By contrast, goods spending declined for the second month running, down 0.2% after a 0.5% fall in July. Annual growth for goods is tracking at 2.5%.

Australia's trade surplus narrows to $1.8bn in August

Australia's goods trade balance fell from $6.6bn to $1.8bn in August, the lowest surplus posted since June 2018 and vastly below the $6.1bn figure expected. Exports were crunched by 7.8%, their sharpest fall in 3 years, on a pullback in non-monetary gold from record highs in July. Spending on imports meanwhile lifted by 3.2% in the latest month, rebounding from weakness through June and July. 

   

Australia posted its 92nd consecutive goods trade surplus in August, though at $1.8bn this was the smallest surplus since the early stages of this run dating back to the start of 2018. This was a sharp narrowing from last month when the surplus surged to $6.6bn, its highest since February 2024. Surpluses have swung around in recent months, a period of extreme volatility in global trade due to US administration's new tariff regime and subsequent delays around its implementation. Smoothing the volatility, the trade surplus averaged $4.3bn over the past 3 months, and it has been around this level through most of the year. 

Exports fell by 7.8% for the month in August to $41.9bn ($AUD terms), down 2.5% on 12 months ago. This was the largest month-on-month decline for exports since July 2022. Non-monetary gold exports nearly halved to $3.3bn in August (-47.2%), after accelerating to a record high in July ($6.2bn). While a notoriously volatile category, this is a surprising movement given the elevated levels the precious metal is trading at. Non-rural goods exports fell 2.8% to $31.8bn, driven by weakness in coal (-4.8%), LNG (-8.4%) and metals (-8%). Iron ore exports (0.2%) held their own. Going against the trend, rural goods lifted by 3.1% to $6.6bn; these exports have surged in value over the past year (22.1%) amid strong offshore demand for Australian produce.  

    

Spending on imports increased by 3.2% to A$40bn in August, a new record high that stands 7.8% above its level from 12 months prior. All categories rose in the latest month. Consumption goods increased by 5.8% ($12.7bn), their strongest lift since December 2023 - albeit after sizeable falls in June (-5.4%) and July (-3.2%). Underlying drivers included vehicles (7.1%) and clothing and footwear (5.7%). A 2% rise came through in intermediate goods ($16bn), while capital goods advanced by 1.8% to $9.9bn.  

RBA unchanged in September

The RBA left the cash rate at 3.6% in a unanimous decision by the 9-member Monetary Policy Board at today's meeting in Sydney. Having cut rates on three occasions this year by a total of 75bps, today's message was one of caution from the Board, with the full effects of less restrictive policy still to play out and due to upside risks to inflation. Markets interpreted this as a hawkish hold that indicated a rate cut at the next meeting on Melbourne Cup day was now less likely than a 50/50 prospect. At the post-meeting press conference, Governor Bullock said the outcome will come down to the upcoming inflation and labour market data and the RBA's updated economic forecasts.  

Today's decision to leave rates unchanged was widely expected, continuing the cut-hold sequence the RBA has stuck to since its easing cycle commenced in February. Key factors the Board cited in its decision statement were the recovery in private demand, areas of inflation persistence and labour market tightness. Rate cuts are seen to be working as anticipated but will likely continue to support demand and that has the RBA cautious at this stage. The domestic data and developments offshore (particularly around trade) hold the keys to unlocking further easing. Markets still expect the RBA will cut rates at least once more this cycle, though that is not fully priced until next year now. 

The uptick in the monthly CPI data through July and August have suggested to the Board that inflation may be set to come in stronger in Q3 than RBA staff earlier forecast. The full quarterly CPI report that the Board sets policy to is not due until late October. Governor Bullock said the labour market had eased with employment growth slowing and wages growth cooling, but the Board still judged conditions to be skewed towards the tight side.

Positive signs have emerged around the consumer, which the Board attributed to rising real incomes, wealth effects, and the earlier rate cuts. There is a case that this makes the need for further easing a little less pressing, though the Board does not seem entirely convinced by the durability of this recovery. On the other hand, if the recovery is sustained, the Board sees risks that businesses may start to pass through higher costs again and tightness in the labour market could reaccelerate. The next RBA monetary policy meeting is due for November 3-4.