The latest labour force report for September is again very strong and means that any hope of a rate cut from the RBA before the New Year is gone. We also see the chances of a February 2025 rate cut fading fast and look towards May being the first opportunity for the RBA to cut the cash rate but contingent on the labour market softening materially in the meantime.
Essentially, what the September labour force report shows is that employment growth is very strong, up 3.1% y-o-y with the latest 3-month period to September showing annualised growth of 4.4%. Employment growth has been accelerating through 2024 with employment up 106,700 in the three months ending March, up 111,700 in the three months ending June, and up 155,600 in the three months ending September.
The civilian population over the year to September has risen at a fast pace too, up 2.5% y-o-y but no match for growth in employment, up 3.1%. The employment to population ratio has risen by 0.4 percentage points over the past year to a new record high of 64.4%. The labour force participation rate measuring the proportion of the population over age 15 in work or actively seeking work has risen 0.7 percentage points over the past year to a new record high of 67.2% in September.
The unusually large increase in the participation rate accounts for why the unemployment rate has not fallen with the big increase in total employment. Instead, the unemployment rate is tracking sideways around 4.1% through 2024 so far, still an unusually low unemployment rate given that the unemployment rate was tracking around 5.2% the year before the start of covid pandemic.
In the near term, the much stronger than expected labour market presents a forecasting headache for the RBA. Its latest set of economic forecasts produced back in August are now pitched too soft and need material upward revision.
The RBA’s August employment forecast that employment would be up 1.9% y-o-y in December 2024 is much too weak given that employment is up 3.1% y-o-y in September. Employment would have to fall by 90,000 over the remaining three months of 2024 to bring annual employment growth down to 1.9%. If employment growth slows to half the current trend monthly rise (44,400 in September) over the remaining three months of this year, employment would be up 3.1% y-o-y in December 2024.
This is an unusually big likely upward revision in the RBA’s employment forecast in the approaching November Monetary Policy Statement and implies material changes to other economic forecasts too.
The December 2024 forecast unemployment rate will need to be reduced from 4.3% to probably 4.1%. Forecast wage growth at 3.6% y-o-y for December 2024 will need to lift as too will growth in real household disposable currently forecast at 2.6% y-o-y.
In turn, it is likely that underlying inflation will be stickier and higher than the RBA forecast through 2025. At present, the RBA is forecasting trimmed mean inflation at 3.5% y-o-y in December 2024, moderating to 3.1% in June 2025 and 2.9% in December 2025.
If near-term employment and wage growth are revised higher in November that implies at least 0.1 or 0.2 percentage points upward revision of underlying inflation forecasts for 2025. While headline CPI inflation may still fall inside the RBA’s 2-3% target band briefly late 2024 and early 2025, it is likely that the bounce post energy rebate/ low petrol price period in the second half of 2025 will be greater than the current RBA CPI forecasts of annual inflation falling to 3.0% y-o-y in December 2024, 2.8% in June 2025 and then lifting to 3.7% in December 2025. The December 2025 CPI forecast may need to be revised up nearer to 4.0%.
This is our take on what may appear in the RBA’s economic forecasts in November because of the continuing strength of labour market conditions. These likely changes to the RBA’s economic forecasts to be presented to the November 5th RBA Board meeting mean no chance of a rate cut at this meeting or the one after in December.
The likely November changes to the RBA’s economic forecasts also mean that there will need to be a run of much weaker economic data to bring in to play a rate cut at the first board meeting in 2025 in February. The current strength of the labour market makes a turn to much weaker economic data less likely. We may be holding out until May next year before there is any chance of a rate cut.
The fading chance of an RBA rate cut any time soon is reflecting in the Australian bond market. Over the past month, the 2-year government bond yield has risen by 27 basis points (bps) to 3.89%, implying more limited scope to cut much at all the current 4.35% cash rate between now and the end of 2026.
Interestingly, the 10-year bond yield has seen an even bigger rise in yield than the 2-year yield, up over the past month by 39bps to 4.30%, a sign not only of limited potential for rate cuts, but also that rates might stay relatively high over the longer term.
Our current thinking is that the RBA could start cutting the cash rate in May next year but the extent of cuts in the next cycle will be limited. We place a base on the cash rate around 3.10% in 2026 and see the next rate hiking cycle starting in 2027. We believe the bond market has good reasons not just to return the 10-year bond yield above 4.00% but to mostly keep it above over the next year or two.