Key Takeaways
- Australian employment fell 39,300 in September, a surprise drop.
- Investors scaled back expectations of a November rate hike.
- Bond market rallied as the Aussie dollar weakened.
The Australian dollar experienced a significant decline on Thursday, dropping 0.4% to $0.6945, following a surprisingly weak jobs report. The data showed a 39,300 decrease in employment, the largest drop since early last year, which was a shock to analysts expecting a 20,000 rise.
The jobless rate remained at a five-year high of 4.7%, with August's figures revised upward to 4.6%. This development will likely impact the Reserve Bank of Australia (RBA), which had not anticipated reaching 4.7% until the end of 2027.
Markets reacted swiftly to the news, reducing the probability of a November rate hike to around 9%, down from 32% before the data release. The chance of a December rate hike also fell to 28% from 56%. The RBA has already increased rates by 100 basis points this year to 4.6% to combat persistent inflation, and it left the door open for further tightening if necessary.
Abhijit Surya, a senior APAC economist at Capital Economics, commented, 'The clear deterioration in labour market conditions should give the RBA greater confidence that policy settings are adequately restrictive.' He added, 'With the full impact of policy tightening yet to be felt, we think the labour market will slacken further, easing RBA concerns about persistent inflation and strengthening the case for keeping interest rates on hold.'
Despite the soft jobs report, markets still anticipate 17 basis points of hikes by May next year, a far cry from the 75 basis points of tightening expected by the US Federal Reserve. The greenback's strength, driven by a hot reading on US core inflation, also contributed to the Aussie dollar's decline.
The New Zealand dollar fared similarly, holding at $0.5609 after hitting a 17-month low of $0.5566 overnight. A sustained breach of $0.5580 support could lead to a low from April last year at $0.5485, and then a trough from 2020 at $0.5469.
The bond market saw a significant rally, with Australian 3-year bond futures jumping 11 basis points to 95.190, leaving cash yields 2 basis points under Treasuries. This positive movement in the bond market was a direct result of the Aussie dollar's weakening, providing much-needed relief to investors.
Economists and market analysts are closely monitoring the situation, with the RBA's next move expected to be influenced by the ongoing labour market conditions and inflation pressures. The Reserve Bank's decision will have significant implications for the Australian economy and the broader financial markets.
The clear deterioration in labour market conditions should give the RBA greater confidence that policy settings are adequately restrictive.
Abhijit Surya, Senior APAC economist at Capital Economics
