Australian unemployment decline supports RBA rate-pause call

[SYDNEY] Australian unemployment declined in October and the economy added more jobs than anticipated, suggesting the labour market remains tight and vindicating the Reserve Bank’s decision to leave interest rates unchanged. Stocks and bonds slumped.

The jobless rate fell to 4.3 per cent from 4.5 per cent in September and was better than the predicted 4.4 per cent, data from the Australian Bureau of Statistics showed on Thursday (Nov 13). Employment advanced by 42,200 – led entirely by full-time roles – more than double the expected 20,000 gain. 

The Australian dollar and policy-sensitive three-year government bond yields jumped after the release, while stocks slid the most since September as traders slashed expectations for rate cuts next year. Swaps markets were pricing less than 40 per cent chance of an easing by mid-2026, compared with 70 per cent by September 2026 on Wednesday.

“With the RBA already suggesting that the labour market errs tight, the output gap is positive and there is stickiness in inflation, these data will largely reinforce that view and keep them on the sidelines for the foreseeable future,” said Su-Lin Ong, chief economist at Royal Bank of Canada’s Australian unit. 

“Labour market resilience amid an economy with little spare capacity suggests that a slightly restrictive policy stance at 3.6 per cent is both appropriate and prudent,” she added.

Jobs data are crucial for the RBA’s rate-setting board as the resilience of the labour market, and worries about its tightness potentially rekindling price pressures, have been among factors driving a cautious approach in the current easing cycle. The central bank kept borrowing costs unchanged last week and governor Michele Bullock signalled further easing is unlikely in the near-term after three rate cuts this year.

The cautious tone follows months of volatile trading, with markets pricing out RBA policy easing – a sharp reversal from early September, when traders expected two more rate cuts in the cycle.

Since then, the yield on three-year notes has jumped around 40 basis points. Coupled with demand for longer-termed bonds on expectation Australia may reduce the amount of debt issuance this fiscal year, the gap between three- and 10-year bonds has narrowed.

Longer dated yields have also climbed relative to US peers on diverging central bank policy outlook, trading at their highest relative to Treasuries since August 2024. That has helped support the Australian dollar, among the best-performing Group-of-10 currencies peers since Sept 1.

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“We retain bias for Australian dollar to trend higher,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. in Singapore. “A relatively resilient Chinese yuan and the RBA nearing the end of its cycle are factors supportive of Aussie, so long global growth holds up and US dollar softness return.” 

The RBA expects the jobless rate will sit at 4.4 per cent through its forecast horizon while employment growth is seen slowing this year and next. The forecasts released last week assumed the cash rate at 3.4 per cent in mid-2026, implying just one cut between now and June.

Australia’s labour market has been a bright spot in the economy, though it has gradually cooled from post-pandemic highs. Even so, the RBA’s latest assessment was that the jobs market remains tight based on a range of indicators including an elevated ratio of vacancies to employed workers, above-average share of firms experiencing difficulty finding workers, high unit labour cost growth and model estimates of full employment.

Data released this week have pointed to a strengthening in the economy, with optimists taking the ascendancy in monthly consumer confidence for the first time in nearly four years and home loans surging to a record in the third quarter led by lending to investors.

In a sign of a pick up in economic momentum, data from Colliers shows retail rents in Sydney CBD have risen 3 per cent since 2022, driven by strong tourism, infrastructure upgrades and a surge in luxury and dining demand while vacancy rates have dropped with foot traffic now at 84 per cent of pre-pandemic levels.

“We are witnessing positive momentum in Australian CBD retail,” said Michael Tuck, head of Retail Leasing & Advisory. “As Sydney approaches the Black Friday and Christmas trading period, increased foot traffic, tourism inflows and elevated consumer confidence are expected to further reinforce retail performance heading into summer.”

Earlier this week, RBA Deputy Governor Andrew Hauser said policymakers are being challenged by an apparent lack of spare supply capacity in the economy just as it enters a recovery phase, raising the risk of renewed inflation pressures. BLOOMBERG