Key insights from the week that was.
Australia’s only data release this week was the August Labour Force Survey. Employment surprised to the upside, rising 39.5k. But, once again, new labour demand was more than offset by supply as the participation rate bounced 0.2ppts higher to 67.1%, just shy of January 2025’s 115-year high of 67.2%. As a result, the unemployment rate increased from 4.5% to 4.6% and was close to rounding up to 4.7% (4.65% to two decimal places).
There may be some residual seasonality in August’s print related to the new survey collection model. However, the underlying trend is still consistent with a gradual easing in the labour market, seeing the unemployment rate drift higher. We expect this to continue through to the first half of 2027.
The strength in labour force participation also speaks to the broader issue of Australia’s supply capacity. As discussed by Chief Economist Luci Ellis, the RBA’s assumptions around participation, productivity and the NAIRU collectively skew towards a weak assessment of supply capacity. For participation in particular, the RBA’s near-term assumptions are downbeat compared to recent demographic trends and also sit below Treasury’s longer-term projections as set out in the 2026 IGR. As above, the August LFS emphasises that slack could emerge more quickly than the RBA’s forecasts imply without an outright fall in employment.
Ahead of next week’s RBA meeting and inflation data, our latest state-level analysis provides perspective on the persistence of underlying price pressures, particularly the importance of housing-related components. For a broader assessment of the fiscal backdrop and the implications for the states, our latest state fiscal update explores how the housing market correction and changes to NDIS funding arrangements are pressuring state finances.
Before turning to this week’s events offshore, it is important to highlight that last Friday the Bank of Japan raised its policy rate by 25bp to 1.25%. Policymakers maintained a constructive assessment of the economy, pointing to resilient consumption, ongoing labour market tightness, and solid investment spending. More importantly, the Bank expressed growing confidence that inflation is increasingly being sustained by domestic wage and demand dynamics rather than imported cost shocks alone.
In our view, the emphasis placed on improving underlying inflation dynamics suggests policymakers are becoming increasingly comfortable that inflation is able to be sustained by domestic demand and wage growth. Normalisation is likely to remain gradual, but the Bank appears firmly on a path towards further tightening, with rates likely to reach 1.5% by mid-2027.
This week, market participants have focused on discussions between the US and China on trade, security and technology as President Xi visits Washington.
Preliminary discussions between US Treasury Secretary Bessent and Chinese Vice Premier He Lifeng ahead of President Xi’s arrival in Washington were characterised by both sides as productive, and Treasury Secretary Bessent subsequently announced that discussions in Washington would leave trade negotiations for upcoming meetings between the two leaders in Shenzhen and Miami. To allow room for this deferral, the current trade truce will be extended until January 2027. President Trump subsequently outlined that discussions during President Xi’s Washington visit would instead focus on security, technology and AI.
A more constructive tone was also seen between the US and Iran overnight, if press reports are accurate. According to Bloomberg and Reuters, sources suggest the US and Iran are again exploring a staged deal which would see Iran re-open the Strait of Hormuz and the US lift its blockade of Iranian ports. Negotiations are occurring on the sidelines of the UN General Assembly, with Qatari officials mediating.
President Trump continues to show little interest in a deal before November’s mid-term elections, but the global economy is under increasing pressure as the price of Brent oil hovers between USD100 and USD110 while refining spreads add additional impetus to refined product prices. The mooted consideration of a potential US diesel export ban this week makes clear that the US is not immune from this pressure despite having significant domestic energy supply and refining capacity, relative to their own demand.
The consequences of the current energy supply shock and other disruptions the US have experienced over the past year remain front of mind for FOMC members. Those speaking this week such as NY and Cleveland Fed Presidents Williams and Hammack highlighted the risk to inflation expectations from a series of supply shocks when the economy is fully employed, and the likelihood of an additional hike(s) being required to rein in current inflation momentum and risks. Williams noted that expectations of another hike by year end are “reasonable” and that the FOMC have “a lot of work to do”. Debt market’s concern remains acute, having now almost priced in four hikes over the coming year and taken the US 10-year above 5.00%, currently 5.20%.
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