Australian Job Market Unexpectedly Weakens, Reducing RBA Rate Hike Bets

What happened

The Australian job market experienced an unexpected slowdown in September. According to data from the Australian Bureau of Statistics, employment fell by 39,300 jobs, contrary to expectations of a gain of around 20,000. August's figure was also revised down to a gain of 29,300. The decline was driven entirely by a 73,700 drop in part-time jobs, the weakest month in five years, while full-time employment saw an increase of 34,400. The unemployment rate held steady at 4.7%, exceeding projections of 4.6% and remaining at a five-year high. The participation rate retreated to 66.8% from 67.1% in August, falling below the expected 67.0%, which helped limit a further rise in unemployment. Hours worked increased by 0.1%, and underemployment edged up to 6.3%.

Why it matters

The weak Australian labor market data significantly alters the outlook for the Reserve Bank of Australia's (RBA) monetary policy. Previously, the market debated the possibility of another rate hike; now, the discussion shifts to the likelihood of a pause in the tightening cycle. The RBA closely monitors employment data to assess the impact of its monetary policy on the economy, and the observed slowdown suggests that tightening is already taking effect. The volatility in the data, especially in the split between full-time and part-time jobs and the participation rate, adds a challenge to the RBA's interpretation, but the overall trend points to a softening.

Market impact

Interest Rates and Bonds: Australian three-year government bond yields fell by approximately 10 basis points after the data release. Pricing for a November RBA rate hike plummeted to around 15% from just under 50% earlier in the month, and December expectations were also reduced to about 40%. The market now no longer prices in a hike before the first half of 2027, reflecting expectations of a more dovish RBA stance. Dollar and FX: The Australian dollar (AUD) dropped after the release and has stayed near its lows. This performance contrasts with the appreciation of other major currencies and gold against the US dollar, which benefited from falling Treasury yields. The prospect of less monetary tightening in Australia offset the broader US dollar weakness. Further AUD underperformance is likely on crosses such as AUD/NZD and AUD/JPY if markets keep paring RBA hike bets. Equities: While the news does not directly mention the impact on equity markets, a scenario of less monetary tightening and a potential pause in rate hikes tends to be positive for stocks, as it reduces the cost of capital and improves corporate growth prospects. However, the weak labor market could signal a broader economic slowdown, which could be a negative factor. Brazil: The direct impact on Brazil is limited, but a shift in monetary policy expectations from a relevant central bank like the RBA can influence global sentiment towards risk assets. A scenario of less global tightening, if replicated by other central banks, could theoretically benefit emerging markets like Brazil, but the Australian dollar's dynamics are very specific.

What to watch

Upcoming Australian labor market data and the RBA's revised forecasts at its November meeting will be crucial. The volatility of recent data calls for caution, and the RBA will likely use the new projections to signal its view on the inflation and employment trajectory. Any signs of stabilization or recovery in the labor market could reignite hike bets, while continued deterioration would solidify a pause.

Scenarios

Base case: The RBA keeps interest rates unchanged in upcoming meetings, awaiting further data to confirm the weakening trend in the labor market and its impact on inflation. The Australian dollar may remain under pressure against other currencies, especially if other central banks maintain a more hawkish stance. Risk scenario: Despite current weakness, underlying inflation remains persistent, forcing the RBA to consider another rate hike, even with a weaker labor market. Alternatively, employment data could prove to be an anomaly and recover quickly, leading the RBA to resume a tightening bias.

Original source: ForexLive (InvestingLive). For information only, not investment advice.