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Japan’s labor market data for October showed nominal wages, or labor cash earnings, rose 2.6% yoy, in line with expectations. Regular pay, or base salary, grew 2.7% yoy, marking the fastest increase since November 1992. Full-time workers saw an even sharper wage rise at 2.8% yoy, the highest increase since comparable records began in 1994. Overtime pay also rebounded, registering a 1.4% yoy growth compared to a -0.9% decrease in the prior month.

However, real wages—adjusted for inflation—was stagnant, showing no change from a year ago. This followed declines of -0.4% and -0.8% yoy in September and August, respectively. The inflation rate used by Japan’s labor ministry for these calculations, excluding owners' equivalent rent, slowed to 2.6%, the lowest in nine months.

On the household front, spending fell -1.3% yoy, better than the forecasted -2.6% yoy decline but still reflecting cautious consumer behavior. Food expenditures, comprising around 30% of total spending, dropped -0.8% yoy. Other categories faced sharper declines, including a -13.7% yoy plunge in clothing and shoes, a -10.7% yoy drop in housing-related expenditures, and a -14.0% yoy decrease in education spending, such as tuition fees.

Weak household income is being masked by an expansion in non-market care economy. The implications for productivity are often misunderstood, meaning the end of that transition could come as a shock to some.

Australian households have been hit by the largest real income shock since the Great Depression. And, although tax cuts and declining inflation boosted real incomes in the September quarter, other sources of income were weak. No wonder the spending response to those tax cuts was so anaemic and private demand has shown essentially no growth in recent quarters.

The RBA has been sanguine about this weakness in private demand. It assesses that aggregate demand has been outstripping aggregate supply, implying that a period of weak demand is needed to close the gap. In our view, though, the output gap has largely closed. The further deceleration in wages growth, unit labour cost growth and output price inflation in the latest quarter are all consistent with this.

The difference is that the RBA’s post-Review framework treats any deviation of inflation from target as a sign of a positive output gap. The Governor’s latest speech framed the assessment in this way: “Elevated inflation indicates that the level of demand in the economy is above the ability of the economy to supply the goods and services demanded.”

While this implicitly acknowledges that inflation expectations have been anchored, it does not adequately allow for lags in price adjustment or the fact that the usual year-ended calculation of inflation incorporates stale information. Nor does it make a distinction between stable above-target inflation and declining above-target inflation. While their models are more sophisticated than this, it seems something has been lost in an effort to simplify communications. Even more perplexing, the speech did not mention wages growth at all.

We also note that the concentration of growth in the public demand segment is part of a broader pattern where the non-market sector of the economy (health & social care, education and public administration – not all public sector) accounts for a larger share of the economy. Combined with growth in new public spending, at 2.2%qtr, outstripping the rest of the economy, these three industries accounted for the bulk of employment growth over the past year or so.

Baristas and care workers

This shift has several implications. First, strong growth in non-market sectors has only a weak link to overall price pressures, because their prices are not determined in markets.Second, taken together, these sectors generate less GDP or output per hour worked (i.e. labour productivity) than the market sector does. Arithmetically, as the share of non-market sector activity rises, measured economy-wide labour productivity falls, as we have previously highlighted. This is about more than different growth rates in productivity. In the transition, where the non-market sector’s share of the economy is rising, it is also a consequence of the differing productivity levels.

Third, measured aggregate productivity is further dragged down because measured labour productivity within the non-market sector has fallen, according to the annual national accounts. This is the result of the shifting mix of occupations within the ‘care economy’ towards relatively low-paid childcare and age & disability care workers – much like the ‘barista phenomenon’ we identified previously.

In the Q&A following her recent speech, RBA Governor Michele Bullock acknowledged that many of these additional workers are doing important jobs with significant positive spillovers for the rest of the community – teaching, nursing, caring for small children and the elderly. What was not acknowledged was that this period of weak demand and an apparently strong labour market may well be a transition phase. Instead, it is being interpreted as a signal that the trend in supply capacity is even weaker than previously believed.

This means that, when the RBA Board leaves the cash rate unchanged next week, it is also likely to keep its messaging similar to recent RBA communications. While there is an argument to pivot the language to signal that they are getting closer to the point of cutting rates, we do not expect that they will.

When the ramp-up ends

Further out, there is the question of what happens when the non-market part of the economy is no longer increasing as a share of the overall economy, which will happen sooner or later. To maintain overall growth, the market sector would need to see faster growth than it has recorded recently. However, historical experience suggests that when one or a few sectors are expanding their share at the expense of all the others, it takes a while before those other sectors’ growth rates bounce back.

The Australian economy could therefore be in for a period of even more subdued growth and much weaker employment than has occurred recently. And while we expect private investment to become a more prominent driver heading into 2026 – reflecting the need to expand capacity, transition to lower carbon emissions, and adopt new technologies – this may be slow to gain momentum.

It’s unclear how long this relative expansion in public demand will continue. Although the ABS reported that growth in NDIS spending was subdued in the September quarter, this and other programs might not have completed their ramp-ups. There are also risks around next year’s Federal election, both from additional boosts to public demand in the lead-in and potential changes flowing from the election outcome. In the short term, then, this shift might have further to run.

The risk is that a period of transition to a new economic configuration is misinterpreted as an ongoing trend. In that case, the shakeout once the transition ends could come as a shock.

Key insights from the week that was.

Australia’s Q3 National Accounts disappointed expectations with GDP up just 0.3% (0.8%yr) as the gap between public and private demand widened – the latter now stalled for six months. While partly explained by the ‘reallocation’ of electricity spending by households to the government through energy rebates, the majority of the divergence comes as a consequence of prolonged weakness in real incomes, elevated interest rates and a historically-high tax burden. Highlighting the cumulative impact on the economy, Q3 marked the sixth consecutive quarterly decline in per capita GDP, the longest (but not deepest) contraction since the 1950s, when official records begin. In this week’s essay, Chief Economist Luci Ellis considers the consequences for productivity and monetary policy.

Looking into the detail of the National Accounts, it is hardly surprising that the primary contributor to the Q3 surprise was household consumption, flatlining in Q3 to be up just 0.4% over the year. The underlying picture for real household disposable incomes was more constructive owing to the stage 3 tax cuts and disinflation, but the 0.8% gain was saved not spent – a result foreshadowed by the Westpac Consumer Panel. On current data, the latest updates on retail sales and experimental measures of household spending point to a solid lift in consumption in October, but our measure of card activity cautions that shifting seasonal patterns around end-of-year discounting are likely to distort affected monthly reads, as occurred last year. Looking to 2025, income and saving dynamics stand as significant headwinds for the recovery in consumption growth.

The external sector also provided little support for GDP in Q3, the current account deficit narrowing slightly from a materially downwardly revised figure of –$16.4bn to –$14.1bn in Q3. The terms of trade are still elevated but have fallen back over the past year; export volumes are also struggling as import volumes gain steadily, albeit recently at a slower pace. While net exports have added 0.1ppts to growth in both Q2 and Q3, prior weakness saw the external account subtract a percentage point from GDP growth over the year.

Before moving offshore, it is worth noting that the latest CoreLogic data highlighted a broadening in the nascent slowdown in Australian house price growth. Affordability is increasingly a concern across the capitals – price growth slowing in Perth, Adelaide and Brisbane, as buyers lower their expectations, and in outright decline in Sydney and Melbourne, where many would be buyers have been priced out. Supply remains critical for the affordability outlook; encouragingly, the firming uptrend in dwelling approvals is coinciding with tentative evidence of easing supply constraints for construction, balancing the risks around the pipeline. For more detail on our views around the housing market, see our latest Housing Pulse on Westpac IQ.

Ahead of tonight’s employment report, data received for the US continued to support a 25bp cut at the FOMC’s December meeting.

JOLTS job openings rose from 7.4mn to 7.7mn in October, reversing September’s decline. Looking through the monthly volatility, the trend remains consistent with a labour market that is slowly decelerating from a starting point broadly consistent with the pre-pandemic experience – when both wages and inflation were benign. The FOMC’s December Beige Book provided further evidence of labour market balance with some glimpses of downside risks, employment characterised as “flat or up only slightly across Districts” and wage growth having “softened to a modest pace”. Unsurprisingly, on inflation, prices were said to have risen “only at a modest pace... [and] Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers”.

The ISM services survey corroborated the above view, the headline PMI falling from 56.0 to 52.1 in November and employment weakening from 53.0 to 51.5, both outcomes well below their five-year pre-COVID averages but still expansionary. The ISM manufacturing survey in contrast shone the spotlight on downside risks, the headline and employment indexes well below average at outright contractionary levels. The prices paid measures meanwhile remained consistent with consumer inflation at target. Altogether, this week’s data supports our expectation of a 25bp cut from the FOMC at their 17-18 December policy meeting. Tonight’s employment report and the upcoming November CPI report will inform on the risks to this view and the outlook for policy in 2025. Chair Powell and other recent FOMC speakers have made clear their policy decisions will be made meeting-by-meeting in a data and risk dependent manner.

• US jobs report (NFP) is highly anticipated, with market expectations for a 200k payroll figure. The unemployment rate is also a key focus, with a potential slight uptick to 4.2%.
• A print in line with expectations could lead to short-lived US Dollar reactions.
• Gold prices are currently range-bound between $2600-$2660, with the 2655-2660 zone being a key resistance area.
• Goldman analyst forecasts and impacts of the NFP report.

Market participants are waiting on today’s jobs report from the US in a week that has seen a lot of choppy price action and uncertainty. The exception being a US equity and Crypto rally which has given markets a wee bit of optimism as the Festive season approaches.

NFP Preview: What to Expect

Heading into the jobs report and market expectations over US monetary policy have seen a significant shift over the past ten days. The probability of a 25 bps rate cut on December 18 has risen from 56% to a high yesterday of 78%, currently at 71%. Will the jobs data later today finally settle the matter?

Source: CME FedWatch Tool (click to enlarge)

The expected Non-farm payroll figure is 200k which would be a significant step up from last month’s disappointing print. Last month’s print was the worst in nearly four years, however it is key to remember the impact of hurricane Milton and the Boeing strikes. These all had a negative impact on job numbers and are all expected to reverse.

A job print above the 200k mark may prove to be less important than the unemployment rate which may be key. Markets are looking at a 4.1% print but I believe we could get a slight uptick toward 4.2%. Either way, should we get a print in the 4.1-4.2% range and a jobs number of 200k plus, I expect any immediate reaction by the US Dollar to prove short-lived. Similar to what we saw last month.

For interest’s sake I thought we could see what Goldman Sachs analysts are looking at from today’s report. Goldman’s analyst gives a scenario analysis for the NFP. The “sweet spot” he says is 150k-200k which he expects will see a 0.5-1% rally. Worst case is >275k which may lead to a Dec FOMC rate cut skip. Notably every other scenario he sees less than a 1% move.

Source: CNBC (click to enlarge)

Impact on the US Dollar Index (DXY)

Such a print should keep the Fed on track for a 25 bps cut at the upcoming meeting and thus should not have any lasting impact on market moves. This could lead to steady US Dollar weakness heading into next week.

The US Dollar is historically weak in December, usually weighed down by portfolio rebalancing and a pivot to more risky assets. The recent rise in US Equities and slight US Dollar weakness may be a sign that this has already begun.

Yesterday saw the DXY print a bearish daily candle close which is a maubozu candlestick. No wick on either side suggests significant bearish pressure as the DXY is back at last week’s lows around 105.63.

A break lower brings the 105.00 handle into focus before the 104.50 handle.

The DXY needs to gain acceptance above the 107.00 handle if bulls are to continue their impressive run from the beginning of October.

US Dollar Index (DXY) Daily Chart, December 6, 2024

Source: TradingView (click to enlarge)

Technical Analysis Gold (XAU/USD)

Looking at the Gold chart below, the range continues to hold between the $2600-$2660 area. The Asian session brought wild price swings for the precious metal with a low of 2612 before rallying toward the 2644 handle.

The one thing that has piqued my interest is the amount of rejections we have had in the 2655-2660 range suggesting this zone remains a key area. For not it appears that risks are tilted to the downside.

If the nobs data comes out largely in line with expectations and rate cut bets increase, I wonder whether bulls will be able to facilitate a breakout and acceptance above the 2660 handle.

A significant increase in the average hourly earnings and a jobs number closer to 300k could result in significant USD strength which could push Gold below the 2600 handle and beyond.

Gold (XAU/USD) Daily Chart, December 6, 2024

Source: TradingView (click to enlarge)

Support

• 2624
• 2612
• 2600

Resistance

• 2660
• 2675
• 2700

Key Highlights

• USD/JPY is consolidating losses above the 148.65 support zone.
• A key bearish trend line is forming with resistance at 151.40 on the 4-hour chart.
• EUR/USD could recover if it clears the 1.0620 resistance zone.
• Bitcoin breached the milestone level of $100,000 and traded to a new all-time high.

USD/JPY Technical Analysis

The US Dollar formed a base and recently started a recovery wave from 148.65 against the Japanese Yen. However, USD/JPY faces many hurdles as it approaches the US NFP report.

Looking at the 4-hour chart, the pair surpassed the 23.6% Fib retracement level of the downward move from the 155.88 swing high to the 148.64 low. The pair recovered above the 150.00 resistance level, but it faces many hurdles and remains well below the 100 simple moving average (red, 4-hour).

On the upside, the pair could face resistance near the 151.50 level. There is also a key bearish trend line forming with resistance at 151.40. The first major resistance is near the 152.20 level.

A close above the 152.50 level could set the tone for another increase. The next major resistance could be the 200 simple moving average (green, 4-hour) at 153.10, above which the price could climb higher toward the 154.00 resistance.

On the downside, immediate support sits near the 149.50 level. The next key support sits near the 148.65 level. Any more losses could send the pair toward the 146.50 level.

Looking at Bitcoin, the bulls pumped the price above the $100,000 resistance zone and the price traded to a new record high above $104,000 on TitanFX.

Upcoming Economic Events:

• Euro Zone Gross Domestic Product for Q3 2024 (QoQ) - Forecast 0.2%, versus 0.2% previous.
• Euro Zone Gross Domestic Product for Q3 2024 (YoY) - Forecast 0.9%, versus 0.9% previous.
• US nonfarm payrolls April 2024 – Forecast 200K, versus 12K previous.
• US Unemployment Rate for Nov 2024 - Forecast 4.2%, versus 4.1% previous.

• EURJPY reversed from key support level 156.00
•  Likely to rise to resistance level 160.00

EURJPY currency pair recently reversed up from the key support level 156.00 (which has been reversing the pair from the start of August) standing close to the lower daily Bollinger Band.

The upward reversal from the support level 156.00 created the daily Japanese candlesticks reversal pattern Morning Star Doji.

Given the strength of the support level 156.00, EURJPY currency pair can be expected to rise toward the next resistance level 160.00 (target for the completion of the active wave iv).

• USDCAD reversed from pivotal resistance level 1.4080
• Likely to fall to support level 1.3990

USDCAD currency pair today reversed down from the pivotal resistance level 1.4080 (which has been reversing the pair from the start of November) standing near the upper daily Bollinger Band.

The latest downward reversal from resistance level 1.4080 is the 5th consecutive failed attempt to break above this level – which signals its strength.

USDCAD currency pair can be expected to fall toward the next support level 1.3990 (low of the previous minor correction from the end of last month).

Summary

Stalling progress on the inflation fight should be evident in the November Consumer Price Index. We expect headline CPI to advance 0.25% over the month and 2.7% over the past year. The core index should similarly rise around 0.25%, which would keep the 12-month change stuck in the narrow range of 3.2%-3.3% for a sixth straight month. While some key sources of inflationary pressure, such as an overheated labor market, continue to dissipate, new headwinds to disinflation have emerged (e.g., the potential for tariffs and tax cuts) that make the final leg of inflation's journey back to the Fed's 2% target look increasingly difficult.

A Bump That Looks Increasingly Long

The stubborn picture of inflation that has emerged over the past few months is unlikely to be altered by the November CPI report. We look for headline inflation to advance 0.25%, which would mark a similar rise to October and push up the 12-month change in prices to 2.7%. After receiving some meaningful respite at the pump since the spring, gasoline prices headed a bit higher in November on a seasonally adjusted basis (+0.2% by our estimates). Meantime, the strength in the producer price index for finished consumer foods the past few months points to CPI food inflation remaining firm. After easing in October, we look for price growth for both food at home and away from home to partially rebound in November, resulting in total food inflation being up 2.2% year-over-year.

Excluding food and energy, inflation is likely to look similarly sticky. We expect the core index to also advance 0.25% in November. This would mark only marginal improvement compared to the past three months' average increase (0.29%) or the average for the year (0.27%) and leave the three-month annualized rate at 3.4%.

The two-month streak of price increases for core goods is likely to extend to three in another sign that goods deflation is subsiding. Used autos are likely to be the primary driver of another positive print for core goods in November, but remaining core goods prices were likely little changed as seasonal adjustment factors are increasingly positioned for holiday-season discounts to begin in November.

Services inflation should at least ease modestly relative to its recent trend. We estimate core services prices rose 0.32% compared to an average rise of 0.37% the past three months. Shelter prices should come in a little softer than October as the downward trend in owners' equivalent rent resumes. Lower jet fuel prices in recent months should also bring some relief to airline fares. We expect to see a pickup, however, in categories like motor vehicle insurance and communications due to some reversion to the recent trend, limiting the overall easing in services prices in November.

While inflation has proved stubborn the past few months, it is not as if there have been no signs of progress. The annual change in shelter inflation has slowed to 5.1% from 6.9% this time last year. With the November report, it should drop below 5% for the first time in two and a half years. Meantime, after bubbling up over the winter, the 12-month change in the CPI super core is back on the downswing. Goods prices are no longer falling as rapidly as they were a year ago, but the rate of price changes has at least returned to its pre-pandemic pace.

That said, the final leg of inflation’s journey back to the Fed’s target is looking tougher and tougher. Some key sources of inflationary pressure, most notably labor costs, continue to dissipate, helped by growing signs of a pickup in productivity growth. Yet new headwinds to disinflation have emerged, including the potential for higher tariffs and lower tax rates, which we have incorporated into our forecast. Overall, we expect the fight to get inflation back to the Fed’s 2% target when measured by the core PCE deflator to drag on through our 2026 forecast horizon, with negligible inroads made in the year ahead.

A New Horizon: The Economic Outlook in a New Leadership and Policy Era

Key Themes

• With Donald Trump elected as president with unified congressional support, economic policy in the United States is set to change rather dramatically. President Trump campaigned on making radical adjustments to U.S. trade policy, specifically reverting to tariffs as a means to balance trade deficits and extract concessions from key trading partners. While clarity on tariff policy is limited at this point, we feel comfortable assuming President-elect Trump will impose levies early in his term. To that point, underlying our 2025 global economic, central bank and FX forecasts is an assumption that President-elect Trump imposes a 5% tariff on all U.S. imports and a 30% tariff on all Chinese exports into the U.S. starting in H2-2025.
• Trump 2.0 tariffs are likely to disrupt, not upend, the U.S. economy. Economic expansion is still likely, albeit at a slower pace, while inflation could remain above the Fed's target as consumers at least partly bear the cost of tariffs. Overall disinflation and a less robust jobs market relative to a few years ago suggest the Federal Reserve is likely to continue lowering interest rates; however, resilient economic trends combined with somewhat firmer inflation should see the FOMC ease monetary policy more gradually going forward. Given our implicit tariff assumptions, we now believe the Federal Reserve will achieve a terminal target range for the fed funds rate of 3.50%-3.75%.
• Exposure to U.S. tariffs is likely to create diverging paths for economic growth for countries around the world. Emerging economies with strong trade linkages to the United States could see the most acute decelerations. China and Mexico are significantly exposed, and while China has offsetting policy mechanisms it can deploy, Mexico has limited monetary and fiscal space to respond to an external trade shock. Based on the growth, inflation and market reaction to tariffs, central banks could adjust monetary policy settings at different speeds, and in select cases, different directions. In particular, we expect the European Central Bank to ease quicker than previously envisaged, while institutions in the emerging markets could operate with more caution, or restart tightening cycles.
• Even following its post-election rally, we continue to believe the U.S. dollar can strengthen going forward. A less dovish Fed, more dovish major central banks internationally, trouble in China and uncertainty around U.S. economic policy should create an environment where the U.S. dollar performs particularly well. We believe those same dynamics will place significant depreciation pressure on emerging market currencies, with “high beta” currencies in Latin America and EMEA underperforming. Idiosyncratic factors can also contribute to particular underperformance from select developing currencies. We expect the euro to fall below parity relative to the U.S. dollar. Currencies associated with more closed economies—such as the Indian rupee—or linked to hawkish central banks—such as the Japanese yen and Australian dollar—can be more resilient in 2025.

Full report here.