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Paths to a cut exist but is narrow
Last week the RBA's November meeting was easily overshadowed by the US election. Now that the dust has settled, we can take stock of the central bank's thinking and the data released since then. The RBA Board met expectations by leaving the cash rate on hold and keeping tight-lipped about the prospects for future rate cuts. Governor Bullock stuck to the line that nothing has been ruled in or out.
Unlike other major central banks, the RBA is still yet to be confident that inflation will return sustainably to target. Of course this is a consequence of the central bank's own actions, having opted to prioritise the health of the labour market by hiking the cash rate to a lesser extent than its peers. Nevertheless, the RBA's balancing act means that every data point is being closely watched.
This week we received some new data that while not game changing, will factor into the RBA's thinking. The wage price index (WPI) grew by 0.8% over the September quarter, equalling the March and June quarter outturns, and a little softer than expected by market economists. More eye catching though was the drop in the annual rate of growth from 4.1% to 3.5% as the strong wage increase driven by last year's award wages decision and aged-care pay rises dropped out of the calculation. The industries with the highest rates of annual growth were utilities (+5.1% y/y) and education (+4.4% y/y), both sectors with higher proportions of employees covered by collective bargaining agreements. Barring these two sectors, annual wage growth eased across industries in the September quarter.
The decline in wage growth was generally in line with, if not a little softer than, the RBA's expectations and reflects the modest softening in the labour market seen over the past year. In good news for households, the combination of the CPI print, the WPI release and the beginning of the Stage 3 tax cuts in July, points to improving growth in real disposable incomes in the September quarter. This improvement in household incomes has likely contributed to the rise in consumer confidence, with the Westpac-MI measure of sentiment improving from 83.6 in the middle of the year to 94.6 in November.
Along with information about wages, we also received the monthly labour market release. Mostly notably, job gains eased back in October. Employment rose by only 16k over the month after average monthly gains of around 45k over the previous six months. Why is this significant? For much of 2024, employment gains have been far stronger than expected. The gains have kept pace with a rapid increase in labour supply driven by both a rising participation rate and strong population growth. This has seen the unemployment rate essentially track sideways at 4.1% since April and comes despite the significant tightening of monetary policy and below-trend growth outcomes over the past year.
The moderation in employment growth in October has been a long time coming and provides a tentative sign that the labour market has begun to soften more meaningfully. Adding to the evidence pile for labour market softening this week, was the NAB business survey measure of employment, which also weakened in October.
While we are confident that the labour market will ease from here, the pace of this softening will be one of the critical factors in determining the timing of the RBA's first rate cut. The RBA released its own set of updated forecasts in its Statement on Monetary Policy last week. The RBA expects wage growth to continue to ease slowly, reaching 3.2% by the end of the year, not too dissimilar to our own forecasts. Also like us, the RBA expects the unemployment rate to rise to 4.3% in the December quarter, implying another two soft employment prints for November and December. Given the RBA's rhetoric is already cautious, the labour market would need to track its forecasts closely to keep a February rate cut in play.
As it stands, the risks are skewed towards the RBA waiting longer to cut, particularly if the labour market shakes off the October result and continues to deliver strong employment gains. This is reflected in market pricing, with a cut not quite priced for May, and Governor Bullock tacitly approving of the balance of risks reflected in the market path at the post-meeting press conference. With everything needing to go right from here, it won’t be long until we know whether a February rate cut is on the cards.