Cliff Notes: 50 Proves the Magic Number

Key insights from the week that was.

The main update for Australia this week was August’s Labour Force Survey. The result again emphasised the strength of labour demand, with employment growing by 47,000, ahead of the 37,000 estimated increase in the labour force. The unemployment rate was unchanged in the month at 4.2%, but only just; at 2 decimal points it declined from 4.24% to 4.16%. The continued meeting of demand with supply points to a broadly balanced labour market and resilient economy, justifying an expectation that economic growth will accelerate in 2025 as inflation abates and the RBA is able to ease policy.

Experiences across the economy are varied, however, as evinced by the latest ACCI-Westpac Survey of Industrial Trends. Australian manufacturers – whom have largely been at the coalface of the discretionary spending slowdown – previously reported difficulties in sourcing skilled labour and now declines in employment, utilising remaining staff at a higher rate when necessary. That stands in contrast to industries providing essential services – such as healthcare and social assistance – which continue to experience persistent growth and thus an ongoing need to increase headcount. Detailed industry-level labour market data, available next week, will provide a better understanding that these underlying imbalances and the risks they pose.

For domestic manufacturing, there were some constructive developments in the latest survey. Businesses have been able to find some pockets of demand over the last six months, seeing new orders increase and output growth remain positive. With demand conditions likely to improve over the year ahead as headwinds abate, manufacturers are eager to invest in buildings, plant and equipment, with a greater degree of confidence than seen prior. The desire to expand capacity and improve the flexibility of their supply chains is understandable given volatile cost pressures and persistent difficulties in obtaining materials and labour.

Next week, we will receive a key partial update on inflation with the August Monthly CPI Indicator. Our preview is now available.

Offshore, markets were focused on the FOMC as it kicked off its long-awaited easing cycle. The BoE in contrast marked time ahead of revised forecasts in November.

At the conclusion of its September meeting, the FOMC decided to cut rates by 50bps to start this easing cycle, bringing the fed funds rate target range to 4.75-5.00%. Chair Powell’s remarks emphasised that the outsized move was a response to balancing risks and so as to not “get behind” with policy. The FOMC’s revised forecasts also made clear members remain constructive on the outlook, the labour market characterised as ‘solid’ and expected to remain that way, with the unemployment rate to peak only 0.2ppts above the current level at 4.4%. Annual GDP growth is also forecast to be 2.0% in 2024 through 2027, slightly above the Committee’s ‘longer run’ estimate of trend growth of 1.8%. As a result, the FOMC projects a slow normalisation after a rapid start, with another 50bps of cuts seen by end-2024 (noting two meetings remain in 2024), then a further 150bps through 2025 and 2026 to 2.9%, the FOMC’s current estimate of neutral.

We expect US growth to modestly disappoint the FOMC’s forecasts, but also see lingering risks for inflation. We therefore see the fed funds rate reaching a low of 3.375% for this cycle in late-2025, with that rate then held through 2026. Chief Economist Luci Ellis’ essay this week focuses not only on the next steps for central banks but also the determinants of neutral and the global rate structure into the medium term.

Across the Atlantic, as widely expected, the Bank of England kept rates steady in an 8-1 vote in September. Messaging from the Monetary Policy Summary was hawkish, emphasising a need to ‘squeeze persistent inflationary pressure’ and risks to the inflation outlook. The Monetary Policy Committee considered three cases; the first saw policy eased quickly as weaker headline inflation fed through to pay and price-setting, while the second saw economic slack discouraging price growth, and the third considered a structural change in the price-setting mechanism, necessitating tighter policy for longer. Central to all three was the uncertainty surrounding price and wage determination. Policy easing is therefore expected to be ‘gradual’ through the rest of 2024 and in 2025 and, all the while, to remain data dependent. On that front, earlier in the week, the August CPI rose 0.3% and 2.2% from a year ago. The annual figure is below the BoE’s forecast of 2.4%. Annual services inflation remains stubborn and elevated however, at 5.6%.

Coming back close to home, New Zealand’s economy contracted 0.2%qtr in Q2, less than both our and the RBNZ’s expectations. Activity was mixed across industries with over half recording declines. Support came from non-food manufacturing, up 4.0% in the quarter but this was more than offset by weakness in consumer-oriented industries like retail and hospitality. In spite of this, household spending rose 0.4%qtr, largely due to spending on essential items such as groceries. Exports were a drag, falling 4.4%qtr after a strong rise in Q1.