Preview: Labour Force Survey — April

Australia's Labour Force Survey for April is due to be published by the ABS this morning (11:30am AEST). Employment reaccelerated over the first quarter of the year, keeping the unemployment rate around its lowest level dating back to the 1970s. A more moderate increase in employment is expected in April, with seasonality around the Easter holiday period coming into the frame.    

As it stands | Labour Force Survey

Australia's labour market remained in robust shape in March. Employment increased well above expectations rising by 53k following a seasonal-related rebound in February (63.6k). Despite a soft start to 2023 (-10.6k in January), employment lifted by 106.1k in the first quarter, its strongest quarterly increase since Q2 2022. 

Strength in employment held the unemployment rate to half-century lows at 3.5% in March as labour force participation (66.7%) remained around record highs. Over recent months, there has been some loosening of conditions in the labour market. Both the underemployment rate (6.2%) and total underutilisation (9.7%) increased in March and have risen from their lows in late 2022, while job vacancies have eased from their elevated peaks. 

Hours worked were broadly flat in March (-0.2%) after surging in February (3.8%) when many people returned to work from summer holidays. Overall, hours worked declined by 0.4% over the March quarter but were 5.5% higher over the year. 

Market expectations | Labour Force Survey

The expected outcome for employment is a 25k rise, with economists' forecasts ranging from 0-40k. That is anticipated to hold the unemployment rate unchanged at 3.5% (range: 3.4-3.6%). The timing of the Easter holiday period shapes as a wildcard in today's report, coinciding with the survey period for April. Whereas the ABS's payrolls series often provides a useful steer on the employment outcome, that is not the case on this occasion. Payrolls fell in the first half of April following a similar pattern around Easter in the past couple of years. But the payrolls data are not seasonally adjusted and the index level in April was broadly unchanged from March. 

What to watch | Labour Force Survey

The RBA retains a tightening bias and it will be watching today's report closely. One of the factors the RBA cited in its May rate hike - a decision that caught markets offside - was the robust labour force report for March. As alluded to above, seasonal factors could make interpreting today's report difficult. But any softening in the labour market could be enough to keep the RBA on hold in June, particularly after yesterday's Wage Price Index failed to deliver an upside surprise on its forecasts. 

Australian Q1 Wage Price Index 0.8%; 3.7%yr

Australian wages growth lifted at its fastest pace in a decade rising by 3.7% over the year to the March quarter. Strong labour market conditions continued to underpin wages growth, which was also supported by new enterprise agreements and public sector wage policies coming into effect. But wages growth still remains in the range the RBA assesses to be consistent with the inflation target. 

Wage Price Index — Q1 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) increased by 0.8% in the quarter, below the 0.9% pace expected and down from the previous quarter (0.9%). Annual growth lifted to 3.7% from 3.4% (revised from 3.3%). 
• Private sector wages lifted by 0.8% quarter-on-quarter to an annual pace of 3.8% (from 3.6%).
• Quarterly growth in public sector wages increased at its fastest pace in a decade rising by 0.9% to be up by 2.9% through the year (from 2.5%). 

Wage Price Index — Q1 | The details 

Wages growth continued to rise through the first quarter of 2023. At 0.8%, the headline WPI rose at a similar pace to the previous quarter. This lifted the annual pace from 3.4% to 3.7%, its fastest since Q3 2012. That compares to a headline CPI inflation rate of 7%.  

ABS analysis reports that individual agreements and enterprise agreements contributed in roughly equal measure to wages growth in the March quarter. Strong labour market conditions are the main factor behind wage increases in jobs covered by individual agreements. Enterprise agreements recorded a larger than usual contribution to wages growth for this time of year, reflecting newly negotiated agreements coming into effect and a lifting of some public sector wage caps. 

The share of jobs (in the private sector) that received a pay increase in the March quarter was 14%, which is in line with the experience over the years prior to the pandemic. Outside of the pandemic period, the largest share of pay increases in Australia has typically occured in the September quarter of each year. The average pay increase that went through in Q1 was elevated at 4.3%. That was up from a 4% increase in the previous quarter but in line with the rise in Q3 2022.  

There remains upward pressure on wages growth in response to the strong labour market. The overall trend from the past couple of years is still intact; the share of jobs receiving small to modest pay increases is declining while the share of jobs receiving larger pay increases is rising. 

There are signs, however, that wage pressures are losing some momentum. Growth in the WPI on both a 3- and 6-month annualised basis was 3.4% in the March quarter, with both measures down from their recent highs and running below the year-ended pace (3.7%). That indicates base effects are adding to the pace of wages growth. If that interpretation is correct, wages growth could struggle mechanically to rise much further as the year progresses, even if the labour market remains strong. It is worth highlighting that the RBA recently downgraded its assessment for the peak in wages growth to 4% from 4.2%. 

Across the industries, wages growth ranges from 2.9% at the low end to 4.4% on the high end (see summary table above). Much of the RBA's focus has turned to wage pressures in the services sector. A weighted average of industries in household services indicates wages growth in that sector is at a decade high but running below 3.5%. There is more pressure coming through in business services where wages growth is close to 4%, though that too is only getting back to its pace from a decade ago, and it has risen only gradually over the past two quarters. 

Wage Price Index — Q1 | Insights

The RBA made a tilt in the hawkish direction at the May meeting, surprising markets with a rate hike citing risks around persistent inflationary pressures. That was despite its assessment that wages growth was not a constraint to a return to 2-3% inflation, based on an outlook where productivity gains are reestablished. As alluded to above, the RBA recently downgraded its outlook for wages growth, to 3.8% in June and then 4% by year-end. But based on today's report, wages growth would need to pick up for those forecasts to be met. For example, the WPI  in Q2 would need to rise by 1% for the annual pace to lift from 3.7% to 3.8%. Nevertheless, in its hawkish mindset, the RBA may draw more attention to other aspects of the report such as the rising share of jobs receiving larger wage rises or the elevated pace of private sector wage increases. 

Preview: Wage Price Index Q1

Australia's Wage Price Index for the March quarter is due to be published by the ABS at 11:30am (AEST) today. Wages growth was running at a 10-year high by the end of 2022, though at 3.3% the pace remained well below the rate of inflation. Despite recently lowering its forecasts for wages growth, the RBA hiked rates in May and signalled that it remains attentive to the risk of second-round effects of high inflation in wage-setting processes. 

As it stands | Wage Price Index

A 0.8% increase in the December quarter lifted the annual pace of wages growth to 3.3%, a 10-year high in Australia. Strong labour market conditions, increases to award rates and the minimum wage and high inflation have seen wages growth accelerate from the lows reached during the depths of the pandemic in 2020 at just below 1.5%. 

Although a much smaller share of jobs received a pay increase in the December quarter (21%) relative to the previous quarter (46%), the size of the average pay increase remained elevated at 4% from 4.3% in Q3. 

Private sector wages growth continued to pick up in the quarter (0.8%) and was running at a 3.6% annual pace. This is materially above public sector wages growth of 2.5%, with the pace being held back by existing wage policies in the sector.  

Wages growth in most industries is tracking in the 3-4% range. In the December quarter, the strongest increase that came through was in the accommodation and food services industry (1.7%) as increases to award rates in the hospitality sector came into effect.     

Market expectations | Wage Price Index

The consensus estimate is for headline wages growth to rise by 0.9% in the March quarter (range: 0.8-1.1%), an outcome that would lift the annual pace to 3.6% (range: 3.5-3.8%). Analysis of higher frequency indicators from the RBA's May Statement on Monetary Policy indicated that upward pressure on wages growth was maintained through the first quarter, though it was noted that the momentum had eased somewhat.   

What to watch | Wage Price Index

In its May Statement, the RBA lowered its outlook for wages growth after the WPI outcome in the December quarter was softer than it had anticipated. The central forecast now is for wages growth to peak at 4% at the end of the year compared to 4.2% previously. But after making a hawkish turn and surprising markets with a rate hike earlier this month, today's report will be closely watched. Markets expect the Board to leave rates on hold in June at 3.85%, but an upside result on wages growth would be a catalyst for that pricing to factor in a greater chance of another hike.   

Macro (Re)view (12/5) | US disinflation supports Fed pivot

Markets traded in a tight range this week. Softer US inflation data appears to support the Fed pivoting to a pause, so too tighter credit conditions reported in the Senior Loan Officers Opinion Survey. The Bank of England hiked rates by 25bps following the likes of the Fed, ECB and RBA last week. The focus domestically next week turns to the labour market with the April employment data and the Wage Price Index for Q1 due.     

US inflation continues to ease 

Disinflationary forces continue to play out in the US, supporting expectations that the Fed's hiking cycle peaked at last week's meeting. April's CPI readings saw headline inflation ease to a 2-year low at 4.9%yr from 5% previously and the core rate (ex-food and energy) tick down from 5.6% to 5.5%yr. 

While still elevated readings, there were signs that inflation is slowing in a broader range of categories. The headline inflation rate has almost halved from its peak in the middle of last year at just above 9%, mostly the result of declines in energy and goods prices. But now services inflation - which had been rising since early 2021 - looks to be softening, with the annual rate coming in to 6.8% from a high of 7.6% two months earlier. 

Over the next couple of months, US inflation is likely to decelerate more rapidly. The recent momentum shows headline inflation is running at a little above 3% on both a 3-month (3.2%) and 6-month annualised basis (3.3%). Furthermore, large increases in inflation from 12 months ago in May (0.9%) and June (1.2%) are about to roll out of the annual calculation. Factoring all this in, headline inflation is on track to fall to around 3.5% by July. A similar process points to a more gradual decline in the core rate to around 5%, but progress nonetheless. 

Easing pipeline pressures validate the outlook for lower inflation. Producer prices on a headline basis slowed to a 2.3% annual pace in April, down from 2.7% in March and from almost 12% at its peak. This reflects declines in input prices and improved supply chain pressures, factors that are contributing to a disinflationary pulse flowing through to households.    

Bank of England hikes 25bps as UK outlook improves  

The Bank of England's MPC hiked rates by 25bps to 4.5% this week. A vastly improved economic outlook - with a recession no longer anticipated by the BoE - and upside risks to inflation saw the MPC voting 7-2 (2 voting for no change) to extend the tightening cycle. The May Monetary Policy Report revised up the UK growth outlook in response to falls in energy prices, additional fiscal support and greater resilience in activity, but the MPC remains focused on the inflation outlook.

Inflation is now expected to chart a slower decline, with the stronger growth outlook pushing back the timing for inflation to fall below the 2% target into 2025. Although that is still a policy-relevant timeframe, Governor Bailey said in the post-meeting press conference that the MPC saw the risks around that forecast as "skewed significantly to the upside" and this justified hiking rates. It was reiterated that the MPC remains attentive to the risk of inflation pressures persisting through wage and price-setting decisions and that it would respond with more tightening if required.

Fiscal support on the way in Australia

The Australian Federal Budget reported a significantly improved fiscal position as elevated commodity prices and stronger-than-expected economic conditions drove an uplift in government revenue. A detailed review of the Budget can be found here, but in summary a revenue windfall has been used to lower future deficits and fund additional cost-of-living support measures in a roughly 80/20 split. 

Support measures inject around $21bn of new stimulus over the coming 5 years, with $12bn of this to effect in 2023/24. There look to be two-sided risks to inflation from this. Relief on household energy bills and rental assistance will mechanically lower inflation, but additional spending could flow from these savings. The measures are also temporary, so the effect on measured inflation will be reversed later on. 

Also in Australia this week, retail volumes contracted by 0.6% in Q1 as households pulled back under pressure from the cost of living and rising interest rates (see here). Meanwhile, domestic dwelling approvals remained at very low levels in March as headwinds continue to impact the home building sector (see here).   

In review: Australian Federal Budget 2023/24 | Revenue uplift improves fiscal position

The Australian Federal Budget 2023/24 capitalises on a substantial uplift in revenue from stronger-than-expected economic parameters, using the windfall to provide some cost-of-living support and to lower forecast deficits. A net $20.6bn of new measures have been announced, which broadly look to carry two-sided risks to the inflation outlook. In particular, a $1.5bn package for energy bill relief will push down on inflation, but that could free up household cash flow for additional spending. 

Federal Budget 2023/24 | Budget Position

A revenue windfall has improved Australia's fiscal position significantly since the previous budget in October. Elevated commodity prices and strong labour market conditions have driven a substantial uplift in government revenue, swinging the budget into surplus this financial year for the first time since 2007/08 and lowering the deficits forecast in the years thereafter.  

A surplus of $4.2bn (0.2% of GDP) is now forecast for 2022/23, a $41.1bn improvement from the deficit of $36.9bn anticipated back in October. The budget is expected to fall back into deficit in 2023/24 as the revenue windfall moderates, exposing the budget to existing structural pressures. The deficit for 2023/24 is expected to be -$13.9bn (-0.5% of GDP), though this has improved from -$44bn forecast in October, reflecting the stronger starting point from the 2022/23 surplus. 

Structural pressures on the budget from areas such as health and aged care, defence spending and interest payments lead to wider deficits over the forward estimates. Deficits of 1.3% of GDP are forecast in 2024/25 and 2025/26 before easing back to a deficit of 1% of GDP in 2026/27.

Federal Budget 2023/24 | Policy Measures

New policy measures announced in this budget focus on providing cost-of-living support. The net effect of the new measures on the economy is $12bn in 2023/24 and $20.6bn over the 5 years to 2026/27. These measures have been funded out of the government's revenue windfall; tax receipts (excluding GST) have been revised up by $114.2bn from the October budget out to 2025/26. The new measures, therefore, are using 18% of this revenue windfall, with the Treasurer banking the remaining 82%.

The cost of new policy decisions is $13.8bn in 2023/24 for a total of $42.6bn through 2026/27. Major measures include: i) increased funding for Medicare ($5.7bn), ii) higher working-age payments (including JobSeeker) ($4.9bn), iii) rental assistance payments ($2.7bn), iv) higher single parent support payments ($1.9bn) and v) energy bill relief ($1.5bn).  

To partly offset the cost of these measures, the Treasurer will levy $19.1bn of new taxes out to 2026/27. The major initiatives are: i) increased tax compliance measures ($9.1bn), ii) higher tobacco excise ($3.3bn), iii) changes to the Petroleum Resource Rent Tax ($2.4bn), and iv) reductions to superannuation tax concessions ($1bn).   

Federal Budget 2023/24 | Payments and Receipts and Debt Outlook 

Factoring in the upgrades to the economic parameters since the October budget, the profile for government receipts has been revised up and revised down for payments. In 2021/22, payments as a share of GDP were 26.7%; they are now expected to fall to 24.8% in 2022/23, outperforming the October budget forecast of 25.9%. But payments then rebound to 26.5% of GDP in 2023/24 (27% previously) and remain elevated thereafter due to structural pressures at 26.8% in 2024/25, 26.6% in 2025/26 and 26.1% in 2026/27. 

Government receipts are expected to come in at 25% of GDP in 2022/23 compared to the previous estimate for 24.5%, equating to an uplift in revenue of $28.4bn. Receipts are then expected to rise to 25.9% of GDP in 2023/24 (up from 25.3% previously). Thereafter, receipts ease to 25.4% of GDP in 2024/25 and then to 25.2% for the following couple of financial years, which reflects commodity prices correcting and softer labour market conditions. 

There has been a substantial reduction in the debt profile since the October budget. In October, deficits were expected to total $235.8bn to 2026/27, but stronger economic parameters have subsequently cut total deficits over the period to $109.9bn. As a result, the government's funding requirement is significantly reduced. Net debt for 2022/23 was revised down to 21.6% of GDP from 23% previously. In the following years, net debt rises but on a more gradual trajectory than previously expected. The AOFM estimates bond issuance in 2023/24 will be $75bn, slightly lower than in 2022/23 ($80bn).

Federal Budget 2023/24 | Economic Outlook

Australia's economic outlook, as forecast by Treasury, is little changed from October. GDP growth is expected to slow below trend this year reflecting headwinds from offshore and the adjustment in household consumption to cost-of-living pressures and higher interest rates. Rapid post-pandemic population growth from net overseas migration will underpin growth. Meanwhile, the tailwinds from elevated commodity prices are assumed to last for longer, as Treasury pushed back the timing for the correction in commodities prices to Q1 2024. 

Inflation pressures are expected to ease next financial year, in part helped by the Government's energy bill relief, with headline inflation in 2023/24 revised down from 3.5% to 3.25%. However, it is not until 2024/25 when inflation is back inside the RBA's 2-3% target band. 

A gradual softening in the labour market is anticipated to lift the unemployment rate from 3.5% currently to a peak of 4.5% by 2024/25. However, wages growth is expected to strengthen into next year, rising to 4% and thus restoring positive real wages growth.  

Australian retail volumes fall 0.6% in Q1

Australian retail sales volumes have declined for two quarters running for the first time in more than a decade as headwinds on household spending intensified. March quarter volumes were down by 0.6% after falling by 0.3% in Q4 2022. Weakening demand is seeing retail price inflation ease.   

Retail Sales — March | By the numbers 

• Retail sales lifted 0.4% in March - in line with the preliminary estimate - to $35.3bn. This was after a 0.2% rise in February.  
• 12-month retail sales slowed to a 5.4% pace from 6.4%.

• Quarterly retail sales volumes declined by 0.6% in Q1 following Q4's 0.3% fall.
• Year-ended volume growth decelerated from 1.8% to 0.3%. 
• The retail price deflator printed at 0.6%, its slowest quarterly rise since Q3 2021.

Retail Sales — March | The details  

As reported last week, retail sales lifted by 0.4% for the month in March. The value of retail spending stalled in the first quarter (0%) on offsetting movements in volumes and prices, slowing from growth of 0.9% in the final quarter of 2022. Underlying sales volumes fell by 0.6% (0.3%Y/Y), with demand weakening under the weight of cost-of-living pressures and rising interest rates. Volumes have now fallen in successive quarters (-0.3% in Q4), the last time this occured was in 2010/2011. Retail prices continued to rise - albeit at their slowest quarterly rate since Q3 2021 - up 0.6% in Q1 (5.9%Y/Y). That was a significant slowing from Q4's 1.2% rise, as discounting led to price falls in clothing and footwear (-1.1%) and at department stores (-1.2%). 

The decline in March quarter sales volumes was driven by a 3.7% fall in household goods; volumes in the category have fallen for 5 consecutive quarters to be 10.3% down from their pandemic peak. That unwind has come alongside the post-pandemic rotation to services spending and a downturn in housing prices. Volume growth continued at cafes and restaurants (1% in Q1), consistent with signs of resilience in services demand. In the past two quarters, cafes and restaurants have risen by 1.2% against a backdrop of weakening demand, with both discretionary-related (non-food) (-2.5%) and total retail volumes (-0.9%) contracting over that period.  

Retail price inflation peaked at the back end of 2022 at above 7%Y/Y. Global disinflationary forces are starting to flow through to goods prices in Australia, and with demand having weakened materially, retail price inflation should fall rapidly in 2023; though if upward pressures re-emerge in food prices that would hamper the rate of decline.     

Retail Sales — March | Insights

Retail demand weakened further in the first quarter of 2023 after declining into the end of 2022. Cost-of-living pressures and rising interest rates are clearly biting. Demand is even weaker than implied by the declines in headline volumes in Q4 (-0.3%) and Q1 (-0.6%), due to rapid post-pandemic population growth. On a per capita basis, retail volumes have fallen for three quarters running, with a 1.1% fall in Q1 following earlier declines of 0.2% (Q3) and 0.8% (Q4). Retail price pressures are easing after peaking at the end of 2022, with weaker demand a key factor.  

Australian dwelling approvals remain weak in March

Australian dwelling approvals remained weak in March and fell heavily over the first quarter of 2023. Rising interest rates, declines in housing prices and pressures in the home building sector are all playing a role. 

Building Approvals — March | By the numbers

• Dwelling approvals (seasonally adjusted) were flat in March (-0.1%) at around 12.7k following a 3.9% rise in February. Approvals are down 17.3% over the year.

• House approvals declined by 2.9% to 8.4k (-15%yr), unable to extend from February's 11.1% rise.   

• Unit approvals rose for the first time in 2023, up 5.7% in the month to 4.3k, the level down 21.5% on 12 months ago. 

Building Approvals — March | The details  

Dwelling approvals remain weak as the effects of rising interest rates, a downswing in housing prices and pressures in the construction sector weigh on the home building outlook. Although there is a record number of new homes under construction in the pipeline (105.1k in Q4), the weakness in approvals points to a sizeable reduction in activity as these homes are completed. Approvals totalled 37.6k in the March quarter, a decline of almost 20% on the previous quarter and the lowest quarterly total since Q1 2012. Quarterly approvals for both houses (24.9k) and units (12.8k) are at their lowest levels in at least a decade. 

As the next charts show, dwelling approvals were weak across the board in Q1, with houses and all higher-density types at low levels.  

Approvals for house alterations have remained elevated well past their surge during the Covid period and long after the end of the HomeBuilder stimulus. As this is measured by the ABS in nominal terms, it reflects labour and materials cost increases. The volume of alteration work done has been unwinding from its Covid peak in recent quarters. 

Building Approvals — March | Insights    

Stimulus measures during the pandemic led to a substantial increase in the housing pipeline in Australia. But capacity constraints have hampered progress in completing homes. Labour and materials costs rose sharply and this has put pressure on the sector, particularly in instances where fixed-price contracts were agreed prior to these uplifts. Insolvencies have risen of late, including a number of high-profile home builders. A downswing in housing prices has been another headwind, though that may be starting to run out of steam, with rapid population growth running up against tight supply. 

Australian housing finance stems slide in March

Australian housing finance commitments have increased for the first time in more than a year rising by 4.9% in March. This comes alongside gains in housing prices in recent months, signs that conditions in the housing market are stabilising even as the RBA continues to hike rates. Fast population growth post the pandemic and tight supply look to be the key factors. 

Housing Finance — March | By the numbers

• Housing finance commitments (ex-refinancing) increased by 4.9% In March - a significant upside result on the consensus estimate (-0.3%) - to $24bn, down 26.3% over the year. 
• Owner-occupier commitments lifted by 5.5% to $15.9bn (-24.8%yr), seeing their first rise in 10 months. 
• Investor commitments posted a 3.7% rise to $8bn (-29.2%) after falling for 13 months in succession. 
• Refinancing continues to surge; a 6.5% rise in March took the level to a new record high at $21.2bn, up 28.5% from 12 months earlier.  

Housing Finance — March | The details 

A 4.9% rise in housing finance commitments in March stemmed 13 consecutive months of declines. Over that period, commitments fell by a third from their January-22 peak of $34.1bn to $22.8bn in February-23.

Owner-occupier commitments lifted 5.5% in March and investor commitments were up by 3.7%, the first instance of both major segments rising since January last year. Over the March quarter, total commitments contracted by 5%, with the owner-occupier segment (-4.8%) accounting for around two-thirds of that decline as the investor segment (-5.3%) also weighed.

The increase in the value of owner-occupier commitments in March was backed up by an increase in loan volumes. This was led by upgraders (7%) and first home buyers (15.8%), with the latter rebounding to a 5-month high. Construction-related loans stabilised (0.2%) but are sitting only marginally off record lows, with rising interest rates, cost increases and solvency concerns in the home building sector impacting sentiment.  

Refinancing lifted through $21bn in March to reset to a new record high. The backdrop of an aggressive RBA rate hiking cycle has seen refinancing rising by almost 30% on a year ago. Refinancing to owner-occupiers topped $14bn for the first time in March, while investor refinancing is also at a record high.   

Housing Finance — March | Insights

Conditions in housing markets across the country are showing signs of stabilising. Housing prices across the capital cities started to rise in March, coming alongside the rise in finance commitments. According to CoreLogic, capital city housing prices slid by around 10% from their recent peak in April-22, following an earlier rise of more than 20% through the Covid period. 

Macro (Re)view (5/5) | Mixed messages

Central banks across the US, Europe and Australia all hiked rates this week, though each with differing narratives suggesting this extended phase of policy tightening is starting to become less synchronized. Concerns relating to the US regional banks look likely to have put an end to rate hikes from the Fed. In contrast, the ECB signalled it will continue to tighten. In Australia, the RBA hiked against expectations and may not be finished yet. 

Fed set to pause...   

The Federal Reseve's tightening cycle has come to a key juncture following this week's 25bps hike, with a pause now more likely than a hike as the next move. This follows what Chair Jerome Powell described in the post-meeting press conference as a "meaningful change" to the FOMC's policy guidance. In effect, the changed guidance change signals the FOMC is no longer minded to hike further, though it has kept that door ajar should the incoming data warrant tightening. Now at 5-5.25% on the fed funds rate, the FOMC removed the reference to hiking to a "sufficiently restrictive level" - a mainstay in its communications since late last year - as the policy rate came into line with members' median projection for the peak rate. 

Now in a data-dependent mode, the FOMC is watching the US banking system as much as anything else, with the regional banks remaining under pressure from deposit outflows. Chair Powell said that credit tightening was expected on the back of these stresses and that would add to the restrictive impulse to the economy coming from rate hikes and QT. Against those headwinds, the labour market remains in robust shape. Nonfarm payrolls lifted by 253k in April to surge past the 185k increase expected. That drove the unemployment rate down to a 54-year low of 3.4% (from 3.5%). While the participation rate was unchanged overall at 62.6%, the prime-age category lifted to 83.3%, surpassing its pre-pandemic level. Improved labour supply has likely been a factor behind average hourly earnings growth slowing from a pace of around 6% a year ago to 4.4%yr in April. 

as the ECB signals it will go further... 

The ECB continued to hike rates this week and, with headline inflation firming to 7%yr in April and the core rate looking sticky at 5.6%yr, signalled it still had work to do. But there were indications that the tightening cycle is nearing the end. The 25bps hike announced by the Governing Council was its slowest hike in the current cycle that has seen the depo rate rise rapidly to 3.25% from -0.5% last June. 

In the post-meeting press conference, President Christine Lagarde said that the ECB's bank lending survey - which reported credit standards had "tightened further substantially" in Q1 - warranted the step down in the pace of hiking. According to a Reuters article, the hawkish members on the Governing Council agreed to a smaller hike in exchange for communication that more hikes were required and the announcement to signal the end of reinvestments in the APP program in July, which Lagarde said would lead to around 25bn in maturing bonds rolling off the balance sheet per month.

while the RBA has turned hawkish again... 

The RBA surprised many with its 25bps rate this week, lifting the cash rate to 3.85% (see here). While the RBA has maintained a hawkish stance since it began hiking rates a year ago, the tone of its narrative has swung around in 2023. The pause in April appeared to be predicated on the strategic view of allowing a gradual return of inflation to the 2-3% target in 2025 in order to preserve the employment side of its mandate, but it said this week that another hike was needed to ensure inflation returns to target "within a reasonable timeframe", wary of the overseas experience of stickiness in services inflation. In light of those concerns, the Board appears to have taken a more cautious outlook on inflation than that forecast by RBA staff in the Statement on Monetary Policy. The inflation forecasts were lowered slightly this year but still projected a 2025 return to the target band. The RBA's guidance is that further tightening "... may be required.." depending on how "the economy and inflation evolve". 

Other highlights domestically this week included signs of a turn in the housing market, with housing prices rising 0.5% in April and lending commitments up 4.9% in March, their first increase since January last year (see here). Retail sales lifted 0.4% in March but were flat in Q1 as headwinds from rate hikes and cost of living pressures weighed on spending (see here). Meanwhile, the trade surplus widened to $15.3bn in March as exports were boosted by a rebound in iron ore shipments (see here).