By Lucinda Jerogin, Associate Economist at CBA
- The unemployment rate ticked up to 4.5% in September.
- The Minutes from the September RBA Monetary Policy Board Meeting and several RBA speeches this week reinforced the more hawkish tone struck in the Statement and accompanying press conference.
- The CommBank Household Spending Insights Index recorded its seventh consecutive month of gains, lifting by 0.6% in September to be 7.5% higher annually.
- Offshore, US-China trade tensions re-escalated. The US government shutdown continued. Political turmoil loomed over France and Japan.
- The week ahead is quieter locally with no major data releases. Abroad, US, UK, Japan, and Canadian CPI are due.
Domestically all eyes were on the labour market last week. The September labour force survey was a surprising set of numbers which left markets on an uneasy footing. Employment rose by a reasonable 14.9k, but a lift in the participation rate from 66.9% to 67.0% saw the unemployment rate tick up to 4.5%.
It should be noted; however, the labour force survey is a notoriously volatile series. In trend terms, employment increased by 20k and the unemployment rate held steady at 4.3%. The trend unemployment rate has been progressively rising this year from 4.0%.
A softening in the labour market should be expected. Employment is a lagging indicator, and we suspect this movement reflects softer conditions in the economy from late 2024 and early 2025 ahead of the rate cutting cycle. Nonetheless markets were quick to react to the softer than expected print, pricing in a higher chance of an RBA rate cut in November and expecting ~18 basis points of cuts compared to ~10 bps prior to the release.
We have been noting the tension in the recent data between activity, inflation and employment. Until this tension is resolved, we expect the RBA to remain cautious and watchful of the data flow. In particular, the Q3 CPI due 29/10. We expect trimmed mean CPI to print at 0.8%/qtr and 2.7%/yr.
The cautious and data dependent nature of the Board was reinforced by the Minutes of the September Monetary Policy Board Meeting released on Tuesday. The Minutes struck a similar hawkish tone to the meeting Statement and accompanying press conference. In short, members “agreed that the flow of information since the previous meeting, the forecasts from August and their judgement about the extent of policy restrictiveness collectively implied that there was no need for an immediate reduction in the cash rate target”.
The economy has evolved differently than the RBA had forecast in August. Household consumption has been stronger, and inflation has been sticker. This has brought into question where the neutral rate lies.
To round out the domestic news this week, we released the September edition of our CommBank Household Spending Insights. The CommBank HSI recorded its seventh consecutive month of gains, lifting by 0.6%/mth after a 0.4%/mth rise in August. The annual pace of growth now sits at 7.5%/yr, the strongest pace since May 2023 (excluding the leap year influenced February 2024).
In totality, our internal data continues to suggest the Australian economy is in a cyclical upswing. We retain our base case for only one further 25bp rate cut by the RBA this cycle, favouring February 2026.
Offshore this week, US-China trade tensions dominated headlines.
The week began with the Chinese government standing pat on its new controls on rare earths. The US followed suit, threatening to impose a 100% tariff on Chinese imports. Tensions bubbled on Tuesday as China imposed curbs on five US entities of South Korea’s Hanwha Ocean Co. and refused to purchase American soybeans. This saw President Trump threaten to halt trade in cooking oil.
Heading into the weekend, an extension in the tariff pause, rather than a grand settlement of all trade issues, is the most realistic outcome.
Also in the US this week, the Government shut down continued. FOMC chair Powell spoke on Tuesday highlighting “pretty significant downside risks” to the labour market. The Fed’s Beige Book noted US economic activity and employment was little changed from September. Our international economics team expects the Fed to next cut the funds rate later this month.
Elsewhere political turmoil loomed over Japan and France. China CPI fell by more than expected.
The week ahead in Australia is considerably quieter. In the absence of any major ABS data releases, the major drawcard will be RBA Governor Bullock’s speech at the Bradfield Oration in Sydney on Friday. Markets will be listening for any updates on the Board’s outlook for the economy, particularly given the softer than expected labour market data.
Abroad, US, UK, Japan and Canadian CPI are due. In China, the Fourth Plenum of the Chinese Communist Party’s Central Committee will be held to discuss the five-year plan for 2026-2030. Q3 GDP is also scheduled.
