Key insights from the week that was.
The June Labour Force Survey offered both noise and signal. Employment surprised materially to the upside, rising 76.3k in the month. However, the gain was matched by a sizeable lift in labour supply, the participation rate bouncing 0.3ppts to 67.0%, a 13-month high.
The ABS noted in the June release that there was a large group of individuals outside the labour force with a job lined up in May, and that they began work in June. With the employment gain driven by new labour force entrants, the unemployment rate held steady at 4.4% (edging up from 4.37% to 4.43% at the second decimal place). Rising unemployment and the sharp lift in underemployment over recent months both suggest labour market slack is building steadily.
Unlike previous readings which implied a sudden loss of momentum, employment growth now looks to have been steadier over the first half of the year, albeit with significant month-to-month volatility. This is in line with our belief that any further softening was more likely to occur in the second half once the drag from higher inflation and recent interest rate rises works through the economy.
The Q2 Westpac Business Signal showcased that cost pressures are growing and consumer-facing industries are most exposed to deteriorating growth prospects. Together with weaker employment intentions from other business surveys, this points to a sluggish outlook for employment through the turn of the year when we expect the unemployment rate to peak around 5.0%.
Offshore, the Middle East remained the market’s focus as tensions continued to ratchet higher. Overnight, President Trump stated he was close to deciding on a “massive attack” against Iran and threatened “major military punishment” for the Houthis and Iran if the Houthis attack any other ships in the Middle East after they targeted two Saudi ships a day earlier. This follows yesterday’s threat that US forces “will bomb and destroy ONE BRIDGE OR POWER PLANT, including those located next to, or in, the Capital City of Tehran” any time Iran’s military “shoots at a ship in the Strait of Hormuz”. Iran continues to hold to their position on retaliation, with like-for-like strikes on regional military installations and infrastructure threatened. Brent oil reached USD102 overnight and currently trades just under that level.
Fresh for markets today are the potential implications of the imposition of an announced 10% to 12.5% tariff by the US on 99% of its imports effective 12:01am Friday Washington time. The basis for the tariff is an assessment by US authorities of 60 countries’ restrictions on the use of forced labour in their production chain, though the tariff catches exporters to the US to almost the same degree. This measure replaces the temporary 10% tariff set to expire at 12:00am. As a result, it should have little-to-no net impact on US inflation or growth. That said, it maintains pressure on US households and businesses at a particularly inopportune time and so is a threat to sentiment.
Against that backdrop, the ECB left rates unchanged while emphasising the full inflationary impact of higher energy prices are yet to be felt and that risks remain skewed to the upside. While June inflation surprised to the downside and the ECB, as yet, has seen no evidence of secondary effects from 2026’s energy price spike, heightened uncertainty and the skew of risks favour another hike in September along with the possibility of another late in the year, if conditions do not improve.
Turning to the UK, attention centred on the first week of UK Prime Minister Andy Burnham’s government. Aside from cabinet appointments, Burnham indicated he would operate within existing fiscal rules while pursuing a “new economic model” aimed at boosting growth, likely through cost-of-living measures. He has already removed VAT from household electricity bills and is expected to announce initiatives targeting youth employment and further education. Markets are anticipating a generous Budget in November, although higher-than-expected borrowing is likely to constrain policymakers.
Economic data recently received for the UK is broadly reassuring. Labour market indicators pointed to stabilisation, the unemployment rate holding at 4.9% in the three months to May and employment rising by 148k. That said, alternative measures, including the Bank of England’s Decision Maker Panel, suggest the labour market is at risk of weakening further. The latest inflation data is consistent with a gradual easing in domestic pressures. Consumer prices rose 0.1% in June, slowing annual inflation from 2.8%yr to 2.6%yr. Services inflation was little changed at 3.6%yr, however, indicating that underlying price pressures remain. Taken together, the data did little to materially alter expectations for Bank of England policy.
