Key insights from the week that was.
While the RBA’s decision to leave the cash rate unchanged at 4.35% was widely anticipated, there were noteworthy shifts in language in the decision statement. Most poignant was the removal of the “not ruling anything in or out” guidance that stood in place for the much of this year, suggesting risks to the outlook are becoming more balanced. Indeed, the Board also made it known that it is “gaining some confidence that inflationary pressures are declining in line with [their] recent forecasts”, and that it is relatively less concerned about upside inflation risks. Mirroring these developments, Governor Bullock adopted a decidedly less hawkish tone in the subsequent press conference, speaking at length about the dataflow since the previous meeting which, on balance, has supported the shift towards more neutral language. When pressed on the possible timing of interest rate relief, the Governor conceded that there are scenarios in which the next meeting, in February, could see an initial rate cut, but stopped short of describing one, however.
Given these developments, an interest rate cut in February or April cannot be entirely ruled out; but on balance, May remains the most likely candidate for the start of the normalisation cycle. The next few months of data will prove critical to both the timing and scale of the rate cutting cycle. We continue to expect a relatively short episode, a cumulative 100bps of easing delivered from May through Q4 2025 to 3.35%, a rate we consider to be broadly neutral for the economy.
Data-wise, this week also saw some significant surprises in the latest labour market update, employment rising at a solid clip (+35.6k) and the unemployment rate falling sharply to 3.9%. We caution against reading too much into these results given some underlying anomalies – a ‘pull-forward’ of jobs from December to November due to shifting seasonal patterns and weaker supply jolted the unemployment rate lower in November but may reverse in December. On a multi-month view, it is notable that all key measures of underutilisation are finishing the year near where they started; all the while, wages growth has been decelerating at pace. Provided these dynamics persist, there is a risk that the RBA might find the labour market is closer to balance than its current forecasts imply.
Major US data releases over the last seven days dominated the dataflow offshore. Last Friday’s labour market report was broadly in line with market expectations and our view that slack in the US labour market is building gradually. The payrolls figures showed a 227k increase in November and modest revisions of 56k to the September and October readings. These outcomes left the six-month average gain at 143k, down from 207k in the first half of the year and below the 200k per month we believe are necessary to keep the labour market in balance. The unemployment rate was 4.2%, up 0.1ppts from the prior month and 0.5ppts from the beginning of the year. Nevertheless, growth in hourly earnings remained unchanged at 4%yr, at the top of the range broadly consistent with consumer price inflation of 2%yr. The gradual softening of the labour market should see wage growth continue to soften, limiting inflationary pressures across the economy.
This week’s US CPI release was also broadly as expected and consistent with our view that US disinflation is proceeding. Headline and core CPI indices were both up 0.3% for respective annual rates of 2.7%yr and 3.3%yr, little changed from October. Core goods stood out in the detail, with the steepest increase in 1½ years of 0.3%mth. It was mainly driven by increases in the used and new car categories, likely linked to the impact of recent hurricanes. The shelter component was also up 0.3%mth, leaving the annual rate at 4.7%yr, 1.5ppts below the rate seen at the end of last year. Leading indicators point to the downtrend in shelter inflation continuing, although admittedly it has been slower to come through than expected. Overall, this week’s data has seen market pricing for a 25bp cut at the December FOMC meeting firm to a near certainty. We concur with the market’s view. Critical for 2025 will be the FOMC’s current assessment of risks, as evinced by both the quantitative forecasts and Chair Powell’s guidance in the meeting press conference.
Other major central banks continued easing monetary policy this week. The ECB delivered another 25bp cut at their December meeting, as expected. The tone of the post policy-meeting communication was dovish, with the downtrend in inflation given weight by ECB staff revising their forecasts lower and President Lagarde making known the Governing Council’s confidence and commitment to ease policy towards neutral in coming quarters. Meanwhile, the Bank of Canda acted more forcefully, delivering another 50bp cut. The outsized move followed a further increase in the unemployment rate, disappointing activity growth in Q3 and partial data pointing to further weakness in Q4 which seems likely to persist into next year. With the policy rate now close to its neutral level, decisions about further easing will be made meeting by meeting based on the Bank’s assessment of risks.
After this week’s Chinese CPI data release showed annual inflation remaining near zero into year end, at 0.2%yr, the focus for China quickly turned to news headlines from the latest Politburo meeting and the Central Economic Work Conference. While subtle in tone, the wording used in post-meeting communications carries significant meaning. According to press reports from the official Xinhua news agency cited by Bloomberg, the Politburo has made clear that, for the first time since the GFC, 2025 will see “moderately loose” monetary policy as well as “more” pro-active fiscal policy. Premier Li Qiang subsequently pledged to “forcefully lift consumption” by “every means possible” and, after the Work Conference, a similar message was given as “lifting consumption vigorously” and stimulating overall domestic demand were made authorities’ top priority, reportedly for only the second time in 10 years. Press reports also carried references to improving the social safety net, a long-needed reform. We will likely have to wait until early-2025 for clear guidance on policy detail, but it a material increase in policy support is coming. To what extent its benefit is offset by US trade policy will only be known in time. Westpac remains constructive on China’s real economy in 2025, but believe it will take time for participants to gain confidence and markets to price improving fundamentals.