Australian trade surplus $13.2bn in November

Australia's trade surplus widened in November to $13.2bn as imports declined at a faster pace than exports. Although commodity prices have stepped down from their highs in 2022, exports remain around record highs. The services sector recovery continued with strong momentum into the back end of the year.

International Trade — November | By the numbers

• Australia's trade surplus widened to $13.2bn in November from $12.7bn in October (revised from $12.2bn), defying expectations for a narrowing to $11.3bn.  

• Exports declined by 0.4% in the month to $59.3bn, which followed a 1.2% fall in October. Annual growth eased to 30.4% from 37.4%. 
• Imports contracted for the third month running, down by 1.5% in November to $46.1bn after outcomes of -0.5% in September and -2.0% in October. Annual growth is still elevated at 27.1%. 

International Trade — November | The details

Australia's trade surplus widened for the fourth month in succession, pushing above $13bn in November to its fourth largest outcome on record. A fall in imports (-1.5%) drove the wider trade surplus, despite exports also declining (-0.4%). The balance on goods trade remains highly elevated and expanded to $15.1bn. For services trade, the deficit swelled to wides of more than -$2.5bn around the middle of the year as travel ramped up post pandemic; in November the deficit came in to -$1.9bn. 

Export values were softer in November (-0.4%) following a larger decline in the prior month (-1.2%). This month, the weakness was spread across rural (-0.6%) and non-rural goods (-0.5%) and non-monetary gold (-14.4%). Of note, the decline in non-rural goods came amid crosscurrents from rising iron ore exports (7.9%) but a sharp fall (-12.1%) in other mineral fuels (inc LNG), the latter largely reflecting lower prices. 

The post-pandemic recovery in the services sector continued in November, with exports rising by 4.8% on the back of broad-based gains in transport (4.4%), travel (8.5%) and tourism-related services (8.7%). 

Import values were 1.5% lower in November, to be around 4% down on August's record high ($48bn). The main drivers of that slide have been consumption (-2.1%m/m) and capital goods (-9.5%m/m), potentially highlighting a softening in demand conditions; however, an easing in supply chain pressures and input prices could also be playing through. Intermediate goods were relatively steady (0.6%), with the main component - fuel - seeing a 4.5% lift. Fuel import values are running almost 75% up on a year ago, broadly reflecting the surge in oil prices following the war in Ukraine and other supply disruptions. 

Services imports (1.2%m/m ) continue to track a faster recovery than exports. Tourism-related spending has improved to be 29.2% down from its level at the end of 2019, while exports are 34.3% lower on a comparable basis.  

International Trade — November | Insights

The trade surplus remains highly elevated. Exports have softened in the past two months but are close to record highs. Recent weakness in imports, including in the November report, could highlight some weakening in demand conditions, though inflationary effects on goods prices due to supply constraints could now be easing. 

Black Friday boosts Australian retail sales

A strong Black Friday sales period drove Australian retail sales to their fastest rise since the start of 2022 in November (1.4%). Discretionary sales lifted sharply as households brought forward spending ahead of Christmas to take advantage of discounted prices. The share of retail sales through online channels surged back to levels seen during Covid lockdowns.  

Retail Sales — November | By the numbers 

• National retail sales increased by 1.4% month-on-month to $35.9bn, well above the consensus estimate for a 0.6% rise. Upward revisions to prior months saw the previously reported decline in October (-0.2%) adjusted to 0.4% increase. 
• 12-month retail sales slowed to 7.7% from 13.0%, largely reflecting base effects from lockdown reopenings in late 2021. 

Retail Sales — November | The details  

The Black Friday sales period generated a strong 1.4% lift in retail turnover in November, the fastest month-on-month rise since January 2022. The rise in the underlying discretionary spend (sales ex-basic food) was a sharper 2.3%, highlighting the bring-forward effect on Christmas spending encouraged by price discounting, likely accentuated in the current climate by cost-of-living pressures. Category gains were strongest in clothing and footwear (6.4%) and department stores (5.4%), both outturns posting at 9-month highs.  

Online spending surged by 13% in November; a pace of that magnitude has previously only been seen during the Covid lockdowns in 2020 and 2021. Underscoring the popularity of the Black Friday and Cyber Monday period in 2022, the share of retail sales going through online channels jumped by 1.9ppts in the month to 12.6% — its highest since the Delta wave lockdowns in 2021 and comfortably above the levels reached at the outset of the pandemic in 2020. In turnover terms, non-food spending accelerated by 15.7%; however, Black Friday looks to have had broader effects as the food category also lifted sharply (6.1%). 

Across the nation, there was a notable acceleration in retail sales seen in all states in November. Coming off gains of 0.6% in October, New South Wales lifted by 1.5% in November and by 1.7% in Victoria, with those increases accounting for 60% of the rise in national sales. The lift was also sharp in South Australia (0.1% to 1.3%), Western Australia (0.3% to 1.7%) and Tasmania (0% to 1.4%), though it was more modest in Queensland (0.4% to 1.0%). While Black Friday clearly added momentum to retail sales, there appears to have been an underlying resilience in spending across the states through the back half of 2022, even taking into consideration the inflationary effects that have played through to retail prices. 

Retail Sales — November | Insights 

The Black Friday boost to retail sales in November was notably stronger than expected. Spending was also stronger over recent months than previous reports had implied following revisions to the ABS's seasonal adjustments. This puts retail sales on a stronger footing if an unwind comes through in December. Despite headwinds from cost-of-living pressures and weak sentiment, household spending was resilient over the back of 2022 supported by the very strong labour market and accumulated savings. Those supports hold the key to where household spending heads in 2023. 

Australian dwelling approvals extend slide in November

Australian dwelling approvals extended their slide for a third successive month, with the renewed weakness likely coming in response to the RBA's rate hiking cycle. Further declines remain in prospect, though the residential construction pipeline remains substantial.   

Building Approvals — November | By the numbers

• Dwelling approvals (seasonally adjusted) fell by 9.0% month-on-month in November (vs 0% expected) to 13,898, the level down 15.1% over the year. October's intially reported fall of 6.0% was revised to -5.6%. 

• House approvals declined for the third month running falling by 2.4% to 9,238 (-13.5%yr). 

• Unit approvals posted a 19.9%m/m fall coming in at 4,659, a decline of 18.1% on the level from 12 months prior.

Building Approvals — November | The details  

National dwelling approvals fell by 9.0% in November following declines of 8.9% and 5.6% in the prior two months. This brings the retracement in approvals to almost 41% below their early 2021 peak. The unwind of construction subsidies and other stimulus measures implemented during the pandemic have largely driven the retacement (supply constraints and surging building costs also factors) but now the effects of the RBA's rate hiking cycle and the associated fall in housing prices look to be coming into play.  

House (or detached) approvals actually lifted in the months following the first RBA rate rise in May but have subsequently turned in three month-on-month declines in succession. While approvals have fallen 11.8% since August they are only 4.3% lower stretching back to May. This suggests rate rises are beginning to take hold. Since August, the largest declines have come in Western Australia (-17.5%), Queensland (-16.9%) and Victoria (-13.4%), with more moderate falls seen in South Australia (-6.2%) and New South Wales (-6.6%).   

Approvals in the unit (or higher density) segment were highly volatile for much of 2022 but have shown more sustained weakness recently. November's 19.9% fall was the third decline in succession, which has seen approvals on a rolling 3-month average basis slide to their lowest level since February 2021 at just below 5,700. The available underlying estimates indicate the weakness has been broad based across the low rise, townhouse and high rise segments. 

Building Approvals — November | Insights    

The adjustment in building approvals to the RBA's rate hiking cycle (and to more accelerated falls in housing prices) now looks to be playing out. Although building approvals are likely to see continued declines, a record number of detached homes remains under construction and this will support residential construction activity for a while yet, particularly with supply constraints easing.   

Macro (Re)view (23/12) | Stumps in 2022

A very challenging 2022 draws to a close, a year in which markets had to contend with a range of macroeconomic and geopolitical headwinds. Rapid rate hiking cycles from global central banks in response to surging inflation, the accentuation of supply pressures in goods and energy markets following the war in Ukraine, ongoing disruptions from Covid (particularly in China) and elevated volatility are just some of the key themes that influenced markets. Economies have been remarkably resilient but will be tested in 2023 as the effects of rate hikes flow through. Improving signs on the inflation front have come through recently and if that continues, markets (if not already) appear likely to switch their focus to growth factors in 2023.     

BoJ lifts the anchor  

The anchor point in global bond markets from Japan was lifted this week at the Bank of Japan's policy meeting. The BoJ announced the band for Yield Curve Control (YCC) would widen to allow the 10-year bond rate to rise to 0.5% from 0.25% previously. In the post-meeting press conference, Governor Kuroda said the move did not constitute a rate hike and was made to support market functioning. Indeed, the meeting minutes noted that it was necessary to continue with policy easing to ensure the inflation target is met in a "sustainable and stable manner" backed by wage increases. However, markets have taken the decision as being the first step towards ending YCC and a broader normalisation of monetary policy in Japan.     

US inflation continues to slow 

Monthly US inflation prints continue to show sequential improvement. Underlying inflation on the core PCE deflator was 0.2% in November, down from 0.3% in the prior month and 0.6% at the highs in the middle of the year. The annual pace eased to 4.7% (from 5%), though the pace is softer on both a 3-month (3.6%) and 6-month annualised basis (4.3%), indicating there could be downside risk to the Fed's 2023 projection (3.5% year-on-year). 

Pause enters RBA radar 

The December RBA meeting minutes showed that while the Board considered rate hikes of 25 and 50bps (and ultimately decided on the former), the option of pausing entered the Board's discussions for the first time in the tightening cycle. Further tightening looks likely in 2023, but a pause may not be too far away as I discuss in a more detailed note here.  

ECB's hawkish tones continue   

Communication from the ECB remains strongly hawkish following last week's policy meeting. ECB Vice President de Guindos underscored this point in an interview published on the ECB website where he noted that 50bps rate hikes "may become the new norm" and that rates were still short of reaching the restrictive levels needed to return inflation to target. 

UK economy contracts in Q3 as households cut consumption 

September quarter UK GDP figures were revised to show a slightly larger contraction of 0.3% amid expectations the economy is already likely in recession. Growth expanded modestly through the first half of the year (0.7%), but households hit the brakes on consumption in Q3 (-1.1%) in response to falling real incomes caused by high inflation, with BoE rate hikes an additional headwind. 

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Thanks for reading and for all the discussions throughout the year. Merry Christmas and best wishes for 2023. 

Pause enters the RBA radar

For the first time in the RBA's hiking cycle, the Board considered the option to pause tightening at the December meeting. More tightening is likely in front of the RBA in 2023, but maybe not much more depending on the inflation outlook.  

A recap of 2022...

2022 was an extraordinary year for the RBA. Many of the pandemic monetary policy settings remained in place at the start of the year, with rates sitting on the historic low of 0.1% and QE still running. The QE program was wound up in February, but it wasn't until May that the first rate hike came, a 25bps increase. Hiking was then frontloaded in 50bps increments for the four meetings from June to September. The downshift to 25bps hikes came in October (ahead of many other central banks) and was followed up with hikes in November and December. All told, rates were hiked by 300bps since May, taking the cash rate to 3.1%. 

The path ahead... 

All indications are that the RBA hasn't finished tightening yet. The Board's guidance that it "...expects to increase interest rates further over the period ahead" was retained in December and has essentially been unchanged over recent months. The one caveat to this is that it added back into the December decision statement the qualifier that rates are "...not on a pre-set course". A similar qualifier was used by the RBA earlier in the hiking cycle ahead of the October downshift. On this occasion, it may reflect the optionality the RBA wants to retain going into 2023. The December meeting minutes showed the Board considered 3 different options for policy earlier this month: hiking by 25 or 50bps, or for the first time since the hiking cycle commenced, going on pause.    

The notion of pausing has bouyed local markets, coming on the back of last week's moves by the Fed, ECB and BoE to slow their respective hiking cycles (though all 3 remain hawkish) and in response to softer US inflation data. After initially drawing a firmly hawkish interpretation from the December meeting, markets have scaled back pricing for a 25bps RBA rate hike in February to a 50/50 proposition. Pricing for the terminal rate has remained well below 4%. 

Source: ASX 

In addition to the rate hikes, the RBA's balance sheet will be playing a more active role in tightening monetary policy next year. The quantitative tightening (QT) process started in May alongside the first hike, with maturing bonds being allowed to roll off the balance sheet. But the profile of the RBA's bond holdings has meant the effect on the size of the balance sheet has been minimal so far, reducing only modestly from the pandemic peak to around $630bn currently.  

The next couple of years will see the balance sheet reducing in size significantly. The main driver will be repayments of the cheap liquidity banks were able to access from the Term Funding Facility, with maturing bonds (acquired in support of the 3-year yield target and in the QE program) doing the rest. Because of this, the RBA has maintained the view bond sales are not required as part of QT. The chart below is from a speech by the RBA's Christopher Kent earlier in the year and shows the scale of the unwind that is ahead. Like most of its central bank peers, rates are the primary tool for the RBA, but the key point is that the balance sheet will contribute to a tighter monetary policy stance from next year.   

Source: RBA 

Inflation outlook holds the key... 

The question going into 2023 then is when will the RBA press pause. While it appears likely that rates will be hiked when the RBA returns in February, that might just about see things out. Consistently the Board has referred to the delayed effects of rate hikes on the economy, and as discussed above the balance sheet will be a factor next year. It has also been mindful of the risks of overtightening, noting that it is attempting to return inflation to target "over time" while keeping the economy "on an even keel".     

Before a pause can come, the Board will likely need to see the inflation outlook coming back into the 2-3% target band. Currently, the RBA sees inflation remaining above 3% out to 2024 despite expectations for a growth slowdown over the next couple of years. The RBA is cautious that upside risk to inflation could come from the labour market; however, wages growth only recently cleared 3%, a pace it has described as "not inconsistent" with the inflation target. 

Source: RBA 

The RBA will update these forecasts in February. Deevlopments offshore over the summer could provide an indication of what to expect. A plausible scenario is that there is a further softening in the inflationary pulse and the effects of aggressive rate hikes start to weigh more on growth. If Australia follows suit, lower forecasts for inflation and growth could open the door to the RBA pausing its hiking cycle in March.

Macro (Re)view (16/12) | Hawkish tones prevail

Despite improving signs on the inflation front and weaker growth outlooks going into 2023, central banks continue to assert that they have more work in front of them. That was the key message from the Federal Reserve, European Central Bank, and the Bank of England this week even as all 3 slowed the pace of their respective tightening cycles.  

Australian labour market strengthens further... 

Conditions in the Australian labour market have continued to strengthen, leaving the RBA's guidance for rates to continue to rise in 2023 on track. Employment came in at 64k in November, strongly above consensus for the second month in succession (October was revised up to 43.1k), confirming a reacceleration in employment after a slowdown in Q3 (full review here). Rising employment has been met with a lift in the participation rate back to record highs (66.8%). The unemployment rate held at 3.4%, its lowest rate since 1974, though broader measures of spare capacity declined further such that total underutilisation in the labour force established a new 41-year low (9.3%).

... but sentiment is weak going into 2023 

Consumer sentiment on the Westpac-Melbourne Institute Index bounced by 2.9% in December but is still at deeply pessimistic levels (80.3), reflecting cost-of-living pressures on households. There were indications in the report that households sense the end of the RBA's hiking cycle is nearing, but the effects of the earlier hikes have yet to fully flow through. In anticipation of a material slowdown in household spending, business confidence in the NAB Survey turned outright negative in November (at -4 index points), belying the robust conditions (+20 points) currently reported.   

Fed remains on the press despite easing US inflation 

After 4 successive 75bps rate hikes, the Federal Reserve's FOMC made its well-telegraphed downshift to a 50bps hike this week. The policy rate now stands in the 4.25 to 4.5% range, up by a rapid 425bps since the start of the year. And all indications are that the FOMC is not done yet. The decision statement noted that "ongoing increases" in rates were anticipated and in the post-meeting press conference Chair Jerome Powell said policy had not yet reached the "sufficiently restrictive" levels needed for inflation to return to target. On top of this, the updated set of economic projections raised the median forecast for the peak in the fed funds to 5.1% from 4.6% previously, against market pricing for rate cuts in the back half of 2023.

Indeed, Chair Powell confirmed it was still the FOMC's view that rates will need to remain at restrictive levels for a "sustained period" and that backing away prematurely posed more risk to the economy than overtightening in the first place. Clearly, FOMC members are yet to be convinced that the inflation impulse is waning despite markets taking encouragement from the past two CPI reports (more below). That was underscored by FOMC members' median projections for both headline and core PCE inflation being adjusted higher through to the end of 2024. The upward revisions to inflation in 2023 (3.1% from 2.8% on headline and 3.5% from 3.1% on the core rate) are notable as they come alongside the growth outlook for next year being cut sharply to 0.5% from 1.2%. 

This week's CPI data for November was softer than expected on the back of a downside surprise in October. Headline CPI was 0.1% month-on-month (vs 0.3% expected), slowing annual growth to 7.1% from 7.7%, while the core rate was in at 0.2%m/m (vs 0.3%) and 6.0%yr (down from 6.3%). The two main drivers of the softening in inflation over the past couple of months have been a disinflationary pulse coming through from goods, consistent with improved supply chain pressures and reduced demand (due to spending rotating back to services), and falls in energy prices from their peaks earlier in the year. However, services inflation is still elevated on the back of surges in rents and housing costs. 

Hawkish turn from the ECB 

Although the European Central Bank hiked rates by 50bps (to 2.0% on the depo rate), dialling down the pace from 75bps at the past two meetings, this was far from a step closer to the end of the tightening cycle. In fact, according to a Bloomberg article, there was a "sizeable push" within the Governing Council for the pace to remain at 75bps at this week's meeting. However, the main message was in the decision statement and then in President Christine Lagarde's post-meeting press conference that rates needed to "rise significantly at a steady pace" to reach levels that are "sufficiently restrictive" to bring inflation back down to target. The Governing Council also gave the green light to start quantitative tightening in March, with the plan to initially reduce the reinvestment of maturing bonds in the Asset Purchase Programme by an average of €15bn per month (representing around 50% of redemptions) through to the end of June.   

 

This vastly more aggressive tone from the ECB comes in response to a "substantial upward revision to the inflation outlook". December's ECB staff projections have been revised to show inflation falling back at a slower pace in 2023 (6.3% from 5.5%) and 2024 (3.4% from 2.3%) and to still remain above target at the end of the projection horizon in 2025 (2.3%). Notably, falls in food and energy prices drive the forecast decline in the inflation rate, with price pressures in the core components expected to remain sticky. Reflecting the economic headwinds the euro area is confronting from tighter monetary policy, high energy prices and slowing global growth, a "short-lived and shallow recession" is now factored into the ECB's baseline outlook, resulting in weaker but still positive growth in 2023 (0.5% from 0.9%). A rebound is then projected in 2024, with forecast growth left unchanged at 1.9%.  

ECB chart 

Bank of England downshifts

The Bank of England reverted back to a 50bps rate hike this week lifting the policy rate to 3.5%, downshifting from November's outsized hike (75bps). The less aggressive stance follows the recent Autumn Statement, giving the BoE greater clarity over the direction of fiscal policy under the new leadership of the government, and the BoE's special bond-buying operations that settled the gilt market soon after the mini-Budget was tabled. But even though calmer waters have prevailed, the 9-member MPC split this week's vote 3 ways: 6 opting for 50bps, 2 (Tenreyro, Dhingra) voting for no change, and 1 (Mann) calling for another 75bps hike.

November's inflation data showed a slight cooling in price pressures as headline CPI softened from 11.1% to 10.7%yr and from 6.5% to 6.3%yr on the core rate, but with data on the labour market remaining strong and pay growth pushing up to a 6.1% annual pace, the MPC retained the policy guidance that further rate hikes  "...may be required", reaffirming also that it is prepared to "act forcefully" again if needed. However, the MPC removed its explicit pushback to a peak rate above 5%, reflecting the reduction in market pricing over recent weeks to 4.75% currently.

Crucially, the implications for BoE policy from the government's fiscal plans appear limited. According to the MPC's assessment, the measures in the Autumn Statement modestly lower the inflation outlook (-0.75ppt in Q2) and add to growth in 2023 (0.4ppt). The fiscal impulse to growth is then expected to be neutral in 2024 before turning slightly contractionary in 2025 (-0.5ppt). 

Australian employment 64k in November; unemployment rate 3.4%

Australian employment increased by 64k in November coming in strongly to the upside of expectations for the second month running. A reacceleration in employment from a slowdown in Q3 has drawn a supply response, with the participation rate back at record highs. The national unemployment rate remained at its half-century low of 3.4% and broader measures of spare capacity were reduced further. The report is consistent with the RBA raising rates in 2023. 

Labour Force Survey — November | By the numbers

• Employment increased by 64k in November, well above the consensus estimate (19k). Upward revisions were made to prior months, including an elevation in October's outcome to 43.1k from 32.2k initially reported.

• The unemployment rate was unchanged at 3.4%, remaining at its lowest level since 1974. The underemployment rate fell from 5.9% to 5.8%, driving the broader underutilisation rate down from 9.4% to 9.3%, its lowest since 1982. 
• The participation rate returned to record highs lifting from 66.6% to 66.8%.

• Hours worked were a touch softer in November (-0.4%) coming off a 2.4% surge in October that reflected a significant easing in Covid-related absences. 

Labour Force Survey — November | The details

Employment posted its strongest increase in 5 months rising by 64k in November, with gains coming through in both the full-time (34.2k) and part-time segments (29.8k). This morning's preview provided the correct steer for Macro View readers identifying that the reacceleration in employment in October was likely to carry on into November. Hiring temporarily slowed over Q3 but has reaccelerated sharply to rise by 107.1k over October-November.   

The labour market remains dynamic, with the reacceleration in employment being met with a supply-side response. The participation rate lifted to 66.8% to be in line with its record high, up 0.6ppt since the start of the year and 1ppt above its pre-pandemic level. Growth in the working-age population has lifted since earlier in the year supported by the full reopening of the international border (chart below). The share of the working-age population in work is also at a record high (64.5%) after rising by 0.2ppt in November.  

November's strength in employment was sufficient to maintain the national unemployment rate at 3.4%, equal to its lowest level since September 1974. The underemployment rate came in 0.1ppt to 5.8%, a low to August 2008. The broadest measure of spare capacity in the labour market has come down further, reduced to 9.3% in November to be at its lowest level since March 1982.  

The one aspect of today's report that did not improve from October was hours worked (-0.4%m/m). However, that was coming after a very strong rise in October (2.4%), which was driven by a reduction in Covid-related absences to their lowest level of the year.

In November, the number of people working fewer hours due to illness increased again but was still well down from the peak in August. Meanwhile, new lows continue to be seen in the number of Australians on reduced hours due to economic reasons (such as insufficient work or layoffs etc), consistent with the very low level of spare capacity in the labour market.   

Labour Force Survey — November | Insights

The Australian labour market remains very robust. Employment has reaccelerated following a slowdown in Q3 and forward-looking indicators remain consistent with this strength continuing well into 2023. Spare capacity is at historical lows and the participation rate is up at record highs. Wages growth in this labour market has picked up but only to a 3.1% pace, far from the levels that would concern the RBA that high inflation is driving up wage settings. But the RBA remains cautious and indicated at last week's meeting that rates are expected to rise again in February. Thereafter, I see the case for the tightening cycle to go on pause will build and be on the table in March. 

Preview: Labour Force Survey — November

Australia's Labour Force Survey for November is due for release from the ABS at 11:30am (AEDT) today. Going into today's report, the national unemployment rate is on the lows for the cycle at levels not seen in almost 5o years after employment reaccelerated in October. There looks to be scope for that momentum to continue in November as labour demand remains very strong.  

As it stands | Labour Force Survey

Employment increased by 32.2k in October, well above consensus (15k) and more than rebounding from a fall in September (-3.8k). The full-time segment added 47.1k to employment but was moderated by a 14.9k fall in part-time employment. Over the past year, employment has surged by 5.9% (762k) as the effects of the pandemic and the associated restrictions have eased. 

The unemployment rate established a new low for the cycle falling from 3.5% to 3.4%, its lowest level overall since September 1974. The broader underemployment rate declined from 6.0% to 5.9%, reducing the total underutilisation rate in the labour force to 9.3%, a 41-year low. These outcomes came alongside the participation rate remaining just off record highs at 66.6%. 

Hours worked increased by 2.3% in the month, its sharpest rise in 8 months following a significant reduction in Covid-related absences to their lowest level since December 2021. This drove hours worked to 7.4% above their pre-Covid level. 

Market expectations | Labour Force Survey

The consensus expectation is for employment to rise by 17k in the month, though the range of estimates is once again wide, from zero to 45k. The latest reading from the ABS's high-frequency payrolls series is consistent with rising employment in November. No change is anticipated in the unemployment rate (3.4%) from October (range: 3.3% to 3.5%), with the participation rate also expected to remain steady (66.6%).  

What to watch | Labour Force Survey

After employment surprised strongly to the upside in October, I see scope for a similar outcome in today's report. While vacancy data and job ads have come off their highs, they are still at very elevated levels that make the consensus estimate for employment look modest in comparison. 

Employment is coming off a patchy Q3 where a slight decline was recorded (-4k). The national accounts last week showed that although GDP expanded by 0.6% in Q3, hours worked were largely flat (0.1%) pointing to the effects of seasonal factors and Covid-related disruptions. 

Employment may therefore be playing catch up over Q4, with the October outcome potentially being the first sign of that. Leaving aside the lockdown-affected 2020 and 2021, employment in prior years has shown a fairly consistent pattern of strength over the final quarter, boosted in part by seasonal hiring. The difference this time is that spare capacity in the labour market is at historical lows, so the pace of hiring is likely to be slower. Nevertheless, there is reason to be optimistic on prospects for another upside surprise for employment.

Macro (Re)view (9/12) | Australian economy remains resilient

The rally in US equities from the October low relented as the main indices saw their steepest declines in 5 weeks. In contrast, China moving away from its Covid zero approach boosted some markets in Asia. There are increasing signs that central banks may be past peak hawkishness. In Australia, the RBA hiked by 25bps and will now break for the summer. The Bank of Canada hiked by 50bps but is now "...considering whether the policy interest rate needs to rise further" observing that inflation pressures may be "losing momentum". It is likely that the Federal Reserve, European Central Bank and the Bank of England will all slow the pace of their respective tightening cycles next week.  

Resilient households continue to anchor Australian economic growth... 

The Australian economy expanded by 0.6% in the September quarter as household spending remained resilient to falling real incomes and interest rate hikes. Real GDP growth increased by 5.9% through the year, driven by a consumption-led recovery on the reopening of the services sector from the pandemic. My In review series has in-depth analysis and key charts from the Q3 national accounts here. 

In the quarter, household consumption growth slowed but was still solid at 1.1% (11.8%Y/Y), supported by the ongoing rebound in services spending, notably in travel and hospitality services. Consumption continues to rise against a backdrop of high inflation, weak sentiment, and, more recently, RBA rate hikes. Real incomes have now fallen in 3 of the past 4 quarters (-0.4% in Q3), seeing their largest annual decline (-2.7%) in three decades. But households have been willing to keep spending as the very strong labour market is bolstering income, backed also by a very elevated stock of excess saving accumulated over the pandemic, estimated to be well over $200bn. The early effects of the RBA's tightening cycle have emerged with interest payments on mortgage repayments surging by 36% in the quarter.  

 ... as the RBA indicates rates will rise further 

At this week's meeting, the RBA Board hiked its main policy rate by another 25bps to 3.1%, now up 300bps from the first hike in May (see here). Governor Philip Lowe's decision statement left intact the guidance that the Board "...expects to increase interest rates further", though he reinserted the qualifier that rates are "not on a pre-set course"; similar to a phrase used earlier in the tightening cycle preceding the downshift from 50bps to 25bps rate hikes.

The RBA expects a growth slowdown to 1.5% in 2023 and 2024, but given the scale of the hit to real incomes in the national accounts - coming ahead of the full effects of the tightening in monetary policy - the risks look to the downside. That may make the Board's sensitivity to the growth outlook in its policy deliberations more elevated, continuing to note this week that it is aiming to keep the economy "on an even keel" while returning inflation to target. If the RBA's next set of forecasts in February downgrade the growth outlook and show inflation falling back within the target band by the end of the projection period, a pause in the tightening cycle could be a genuine possibility at the March meeting. 

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Data on Australian international trade confirmed a deterioration in the underlying dynamics following a retracement in commodity prices from the elevated levels reached in the early phase of the Ukraine war. The terms of trade declined by 6.7% and the current account swung into deficit for the first time since 2019 (see here). The monthly trade surplus was still elevated in October at $12.2bn, broadly unchanged from September (see here). 

Fed to hike by 50bps; softer US inflation expected  

A heavy-duty week awaits in the US headlined by the Federal Reserve's policy meeting and the November CPI report. Markets have long anticipated the pace of Fed tightening will slow to a 50bps hike. Much of the focus therefore will be on the new set of projections for the economic outlook and the policy rate. October saw a cooling in US inflation and that is expected to have continued into November, with the key core rate forecast to slow to 6.1%yr from 6.3%. 

The FOMC's projections for the fed funds rate will be effectively marked to market, raising the estimate for the terminal rate from 4.6% to around 5%. Markets will also be looking out for insights around how long the FOMC anticipates rates will need to remain at their peak level in order to lower inflation back to target. Recession risks rise the longer the period of restrictive monetary policy. Throughout the tightening cycle, Fed officials have said the risks of overtightening were less severe to the economy than not tightening enough. However, last week, Chair Jerome Powell was more nuanced on this point, so how the FOMC sees this balance of risks evolving will also be of interest.  

Downshift on the cards for the ECB and BoE next week  

Ahead of next week's ECB meeting, Chief Economist Philip Lane said both the inflation outlook and the quantum of tightening already delivered will factor into the Governing Council's deliberations on rates. Markets have been reluctant to price out another 75bps hike following a recent speech by Executive Board member Isabel Schnabel, but a downshift to a 50bps move may come if the more dovish section of the Governing Council get their way. The updated set of economic and inflation forecasts to be published alongside the meeting are likely to hold the key. A more severe growth slowdown in 2023 (currently 0.9%) and inflation coming back below the 2% target over the projection period would tip the scales to a 50bps hike.  

The Bank of England will also meet next week. Here, markets are more convinced that rates will be hiked by 50bps, with November's larger 75bps hike seen as a one-off move. Since the November meeting, the UK government's Autumn Statement presented what was seen by markets as a credible path for fiscal policy, albeit with much of the tightening delayed until 2024/25. That should give the BoE more comfort over the inflation outlook, allowing it to revert back to a 50bps hike.