Cliff Notes: getting the balance right
Key insights from the week that was.
Australia’s key data release this week was the September Labour Force Survey. Employment surprised to the downside, -39.3k. However, a 0.2ppt decline in labour force participation from August’s near-historic high largely offset. The unemployment rate therefore held at 4.7% after August was revised up.
Residual seasonality may be in the mix. Regardless, the take home point from the update is that the labour market is continuing to ease as employment growth runs below working-age population growth. We expect the unemployment rate to grind higher into 2027 as tighter financial conditions and cost-of-living pressures restrict activity growth to a below-trend pace. Although, our forecast peak is near at 4.8%, due by Q2 2027.
This update on the labour market complicates the communication challenge for the RBA. The September minutes were firmly on the hawkish side, with the discussion focussing on materialising upside risks to inflation. But, with the unemployment rate now through the RBA’s NAIRU assumption of 4.6%, Governor Bullock’s “a little tight” descriptor for the labour market is becoming harder to defend. Still, with a clear focus on inflation risks – which also led us to revise up our near-term CPI forecasts in the October Market Outlook – we still expect a 25bp rate hike at the November meeting.
Over in the US, the headline CPI rose 0.6% as expected in September, taking the annual rate up to 3.7%yr. Energy prices were a key contributor (5.2%, 20.4%yr), while core inflation was a touch above consensus in the month at 0.3% (2.6%yr). Within the core components, core goods prices gained 0.3% after being broadly unchanged over the past 6 months (0.7%yr). Core services meanwhile rose 0.4% (3.1%yr) on a 0.4% increase in shelter (3.2%yr), a 0.6% gain for transport services and a 0.3% increase in medical care services (2.7%yr and 2.5%yr respectively). Further, the subsequent release of the PPI pointed to continued upstream price pressures, with the headline and core measures up 6.3%yr and 5.0%yr respectively. The latest Beige Book provided colour on these developments, firms across multiple districts citing tariffs, insurance and commodity prices as ongoing sources of cost pressure. Guiding on the risks, many respondents expect further price increases as contracts/hedges roll off.
Given their telegraphed concerns over inflation, there is enough signal in these reports to warrant a follow-up hike at the October FOMC meeting. Though it seems Committee members believe they are near the end of the tightening cycle and so have time on their side. This week, Daly and Bowman both showed patience in assessing the trend, with no clear bias towards an October or December decision. Williams stated he believes one more hike would prove sufficient in this cycle given known information. And Waller also showed confidence, highlighting that elevated long-term yields are doing some of the FOMC’s work, restricting demand in interest rate sensitive sectors. We hold a similar view, anticipating that one more hike by year end and a little time will bring inflation near the 2.0%yr medium-term target. However, as discussed in this month’s Market Outlook, capacity pressures are likely to see inflation consistently above target, rather than below, in coming years – particularly if, as we suspect, capacity in the housing sector remains tight. This will mean the FOMC have to remain modestly restrictive over the forecast horizon and will also bias up long-term yields.
In Asia, there was one release that stood out, China’s trade account. At USD133.5bn, the September result was a whisker inside January 2025’s record high of USD137.9bn. More impressively, throughout 2025 and 2026 year-to-date the surplus has now averaged USD100.9bn, almost 3 times the average of 2019, prior to the pandemic. The geographic breadth of export growth is as impressive as the headline annual gain of 36.3%yr, even more so given the ongoing strength in Chinese investment in neighbouring nations’ production chains. In time, both trade and income receipts from offshore investment should buoy the renminbi, although for now continued outbound foreign investment should moderate the pace of gains against other nations in the region, and likely versus the US dollar.
Another key trend assessed in October’s Market Outlook is the evolution of producer prices across Asia, and the likelihood of the disinflationary benefit the west has received in recent decades continuing. Historically, labour cost arbitrage was one of the key drivers of declining goods prices. While still possible, we expect the next phase of manufacturing development to instead be driven by capital, technology and energy. Many end users and the manufacturers undertaking production are also increasingly prioritising resilience, security and specialisation over cost minimisation. It is therefore more probably future supply-chain developments will help contain rising costs through productivity than drive sustained price declines for the goods bought by consumers and businesses.
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