Cliff Notes: Cautious Steps Towards Easing

Key insights from the week that was.

In Australia, headline results from the May Labour Force Survey were in line with Westpac’s forecasts. Growth in employment was solid in the month, up +39.7k (+0.3%), in part due to an unwind of a seasonal dynamic from last month – more people than usual entering employment in May after lining up a job in April. Consequently, the unemployment rate edged lower, from 4.1% to 4.0%. At 2.6%yr, employment growth continues to ease gradually from October 2022’s high of 6.4%yr towards the 2.0%–2.5%yr pre-pandemic range (note these figures use three-month averages). Employment growth continues to keep pace with population growth, leaving the employment-to-population ratio little-changed over the month, near its historic high.

Growth in total hours worked has been much softer than employment, down –0.5% in May to be up just 0.6% from a year ago. The juxtaposition between these two indicators suggests employers are still eager to maintain or expand their capacity, and are using hours to balance current output with demand. This dynamic will be important moving into the second half of the year when we anticipate demand conditions will begin to improve in response to tax cuts and as cost-of-living pressures continue to ease.

Before moving offshore, a final note on the business sector. The latest NAB business survey confirmed that the easing in business conditions over the past two years persisted into May, the index posting another modest decline to be slightly below long-run average levels (–1pt to +6). Having experienced eight consecutive months of forward order declines, businesses are understandably circumspect over the outlook, with confidence moving sharply lower in the month (down 5pts to –3). The uptick in the survey’s cost and price gauges (1.9% and 1.1% respectively) bears close monitoring over the next few months given the RBA aim to maintain an appropriate pace of disinflation and eventually bring inflation sustainably back within the target band.

Over in the US, at the June FOMC meeting, the fed funds rate was held steady and there were minimal changes to projections. The Committee now expects to deliver just one rate cut in 2024 versus three back in March. Four cuts are now expected in 2025 (from three); while the end-2026 forecast is unchanged at 3.125%. The FOMC does not anticipate inflation will improve further in 2024 and also expects it to remain above target through 2025. On the labour market, the unemployment rate is expected to peak at 4.2% by end-2025 from 4.0% today after which it edges down to 4.1% at end-2026 – a figure consistent with full employment based on the Committee’s 4.2% ‘longer run’ view. This assessment of the labour market underpins an above trend GDP growth outlook, at 2.1%yr in 2024 then 2.0%yr in 2025 and 2026.

In the press conference, Chair Powell set a cautious tone regarding the durability of the FOMC’s forecasts. The projections were referenced as ‘conservative’ and Chair Powell noted that further inflation outcomes like May would lead to a more benign profile. Indeed, it seems most Committee members did not incorporate the below-expectations flat May CPI print into their forecasts, Chair Powell noting in the press conference that, when significant data is released during the meeting, participants are reminded they have the opportunity to revise their forecasts, but “most people generally don’t”. Westpac places greater weight on the recent evidence of decelerating momentum in prices and activity, leading us to expect two rate cuts in 2024 followed by four in 2025, the latter view in line with the FOMC’s expectation. Conversely, we see greater upside risk for inflation in 2026 and beyond, leading to a higher terminal rate of 3.375% in mid-2026 compared to the FOMC’s 3.1% end-2026 and their ‘longer run’ estimate of 2.8%.

In the UK, the unemployment rate rose to 4.4% in April as employment fell 139k following a string of declines since the start of 2024. Weekly earnings growth excluding bonuses held around 6% for a fourth consecutive month. However, declining employment looks to be dampening wage expectations, the Bank of England’s Decision Maker Panel survey reporting wage growth expectations for the year ahead has come down from 5.2% a year ago to 4.1% in the latest reading. GDP meanwhile was flat in April as gains in the services sector were offset by declines in industrial production and construction. The BoE’s meeting next week will provide guidance on their assessment of incoming data and the likely timeline to a first cut.

In China, the CPI rose by 0.3%yr in May matching April’s outcome. Services inflation remains the primary driver of consumer prices, though consumer demand is unlikely to support a material acceleration in inflation in services or goods for the foreseeable future. Producer prices fell -1.4%yr in May despite an increase in raw material prices (0.9%mth, 0.5%mth), potentially due, in part, to recent strength in shipping costs.