Cliff Notes: labour market powers ahead
Key insights from the week that was.
In Australia, the central data update of the week certainly did not fail to surprise the market. The September Labour Force Survey (LFS) reported another above-trend increase in employment growth, a gain of +64.1k, driving the employment-to-population ratio to a new record high of 64.4%. Measures of unemployment, underemployment and underutilisation all also managed to tick lower in the month, at a time when a record proportion of Australians are actively engaging in the labour market. This is reflecting not only employers’ clear appetite to expand headcount, but also an underlying normalisation of dynamics around average hours worked – moving from big swings through the pandemic and the RBA’s tightening cycle, to now tracking broadly in line with long-run historical trends.
Whichever way the data is cut, it is difficult to find any real causes for concern about the current health of the labour market. The upshot is that this is therefore unlikely to lead to any material change to the RBA’s views on the labour market. Policymakers will be keeping a close eye on certain dynamics – particularly around average hours worked – as this is the key channel through which the RBA anticipates most of the softening in the labour market will come. Other issues such as the industry-level breakdown will also remain an important consideration in linking the labour market to GDP growth, given the increasing contrast between productivity in non-market and market sectors.
Markets have accordingly pared back bets for RBA policy rate cuts this year, although current pricing suggests there is still a little appetite. Domestically, the economic calendar will be virtually radio silent over the next week, with the only notable data/events being the 2023-24 National Accounts – which will provide updated estimates and detail on industry and productivity – and a fireside chat from RBA Deputy Governor Hauser. All eyes will be on Q3 CPI on October 30, which should provide a more definitive guide on the near-term path for monetary policy. For more detail behind our forecast and the risks surrounding the upcoming inflation print, see our preview here on WestpacIQ.
Offshore, news this week lent to a more dovish tone in most developed markets paving the way for further monetary policy easing.
The European Central Bank cut interest rates by 25bps pointing to the recent weakness in growth and noting that the ‘disinflationary process is well on track’, while financial conditions continue to be deemed ‘restrictive’. Their forward guidance remained unchanged, with the policy statement reaffirming that ‘the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach’. While there were no updated economic forecasts, in the press conference President Lagarde acknowledged that ECB’s projections likely will require downward revisions in the next policy meeting in December. We take this, alongside the evolution of price and growth indicators, to suggest another cut in December is highly likely. A more front-loaded rate cutting cycle should allow the ECB to quell fears around stalling growth momentum, particularly as countries focus more on fiscal consolidation.
In the UK wage growth eased to 3.8%3m/yr, around 2ppt below the levels seen just a few months ago. The pace of increase in private sector regular wages, closely watched by the Bank of England, also slowed to 4.8%3m/yr, down from above-6% at the beginning of the year. This followed other measures, like the Decision Maker’s Panel Survey, which suggested wages are easing. Meanwhile, the CPI data, also released this week, showed that inflation slipped from 2.2%yr to 1.7%yr, undershooting the BoE’s forecast from August by 0.4ppt. Most notably, services inflation eased to 4.9%yr, albeit to a large extent driven by a drop in the volatile airfares category. With wages also having subsided, further progress on services inflation should be imminent. While headline inflation is likely to rise in the coming months in part due to increase in the energy price cap set by regulators, signals that the underlying inflationary pressures are easing faster support our expectations that the BoE will continue cutting the Bank Rate in the remaining two policy meetings this year.
Across the pond, US retail sales data suggested that consumer spending was robust in September and Q3 as a whole. Control group sales were up 0.7% in the month and 1.6% on the three-month basis, with the latter suggesting a sizeable household consumption contribution to GDP growth. The effects of the hurricanes in the US, which seem to have supported retail sales in September, are likely to dissuade consumer spending in the month ahead. The weather-related distortions were visible in other economic data released this week, including the industrial production and claims for unemployment insurance.
Chinese authorities announced additional measures to support local governments, the housing sector and businesses. However, with no pledge to significantly ramp up fiscal spending, market reaction has been mixed. Later today we will receive Q3 GDP data and partial activity data which should reinforce a need for direct stimulus particularly to households. Chief Economic Luci Ellis scrutinizes China’s economic challenges in her essay this week.
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