Cliff Notes: Distilling the Trend

Key insights from the week that was.

The December Labour Force Survey was the only major release for Australia this week. After falling 28.7k in November, employment surged +65.2k, well above consensus (+27k) and even surpassing Westpac’s above-market forecast (+40k). We had expected the rebound in employment to occur alongside a bounce-back in labour force participation; but the participation rate only lifted marginally to 66.7%. This combination meant the unemployment rate surprised, falling from 4.3% to 4.1%.

Looking through the monthly volatility, the past few months results suggest the ‘gradual softening’ narrative, which prevailed through much of 2025, may have paused or come to an end. Jobs growth may be near or at its trough now the rapid deceleration in ‘care economy’ hiring has largely played out, and market sector hiring is starting to pick up. We still think the unemployment rate will drift higher over 2026, as labour force growth outpaces employment at the margin. There could also be some seasonal volatility in the mix, as has typically been the case through summer post-COVID. The next few months will be key to confirming the trend.

Given December’s stronger labour market read and evidence of a moderate consumer upswing, next week’s Q4 inflation data will once again be the deciding factor for the RBA’s February decision. We are forecasting trimmed mean inflation to print 0.7%qtr / 3.1%yr which should be enough to warrant the Board remain on hold. In this week’s essay, Chief Economist Luci Ellis discusses the risk of an upside surprise for inflation and the implications for the RBA.

Offshore, China’s Q4 GDP report showed the economy met its 5.0% target in 2025. However, the growth was narrowly based, with investment in high tech manufacturing capacity and consequent strong growth in exports driving the result as the construction sector continued to contract and consumer demand remained weak. December’s partial activity data makes clear that risks to growth are skewed to the downside into 2026, with retail sales growth slowing to 3.7%ytd in December and fixed asset investment contracting 3.8%ytd, driven primarily by weakness in the private sector. With active fiscal support, China can achieve growth circa 4.5% in 2026. But additional stimulus must focus on households, bolstering the outlook for both income and confidence. Decisive support to end construction’s long and deep contraction is also necessary.

In the US, the PCE price index rose 0.2% in November to be 2.8% higher over the year, broadly consistent with outcomes in October and September. Inflation remains above the FOMC’s 2% target and is expected to remain elevated as tariff effects slowly pass through to the consumer. Survey anecdotes suggest businesses are hesitant to pass on higher costs given heightened price sensitivity among consumers. While inflation is unlikely to re-accelerate meaningfully in 2026, it will remain materially above target and warrant modestly restrictive monetary policy. We expect the Committee to hold rates steady next week, followed by one last rate cut in March and an on-hold stance for the rest of the year.

Across the pond, the UK CPI rose 0.4% in December after a 0.2% fall in November. Annual inflation accelerated to 3.4%, supported by a 4.5% rise in services prices. The monthly gain was driven by volatile components, including a 5.5% month-on-month jump in airfares and a 1.0% lift in food prices. Fiscal measures, such as energy bill reductions and a freeze on rail fares, should contribute to disinflation in coming months. The unemployment rate meanwhile held steady at 5.1% in November, while average weekly earnings slowed slightly to 4.7%yr from a revised 4.8%yr. Employment declined, reflecting ongoing softness in hiring across retail and hospitality. We expect the Bank of England to continue easing through Q1 and Q2 to guard against downside risks to growth.