The hot job market cools down the expectation of interest rate cuts, and the Australian Reserve Bank is expected to extend its wait-and-see mode.

Australia's unemployment rate in October fell, with the number of employed people increasing much more than expected, indicating that the labor market remains tight and confirming the decision of the Reserve Bank of Australia to keep interest rates unchanged last week. Data released by the Australian Bureau of Statistics on Thursday showed that the October unemployment rate dropped to 4.3%, lower than September's 4.5%, and below the market's expectation of 4.4%; the number of employed people in October increased by 42,200 - all from full-time positions, far exceeding the market's expectation of 20,000. After the data was released, traders significantly reduced their expectations for a rate cut by the Reserve Bank of Australia next year, causing the Australian dollar and the interest rates on Australia's three-year government bonds, which are sensitive to monetary policy, to jump, while the Australian stock market experienced its largest decline since September. Pricing in the swap market shows that the likelihood of the Reserve Bank of Australia cutting rates before mid-2026 is less than 40%. On Wednesday, market pricing indicated a 70% chance of a rate cut by the Reserve Bank of Australia before September 2026. Su-Lin Ong, Chief Economist at the Royal Bank of Canada's Australia branch, stated, "Given the Reserve Bank's indication that the labor market remains tight, the output gap is positive, and inflation is sticky, these data will further reinforce this view and keep the central bank on hold for the foreseeable future." She added, "In an economy with limited spare capacity, the resilience of the labor market indicates that the current slightly restrictive policy rate of 3.6% is appropriate and prudent." Employment data is crucial for the Reserve Bank of Australia's interest rate decision-making committee. The resilience of the labor market and concerns about its tightness potentially reigniting inflationary pressures are among the factors that have led to the Reserve Bank of Australia taking a cautious approach to this easing cycle. The Reserve Bank of Australia kept rates unchanged last week as scheduled, with Chairman Lowe hinting that further monetary policy easing is unlikely in the near term following three rate cuts this year. This cautious tone has evolved over months of market fluctuations, with traders cutting back on bets for a dovish policy stance by the Reserve Bank of Australia, in sharp contrast to the expectation in early September that there would be two more rate cuts during this cycle. Since then, the three-year Australian government bond yield has surged by around 40 basis points. Meanwhile, expectations of reduced government debt issuance for Australia in the current fiscal year have increased demand for long-term bonds, narrowing the gap between yields on three-year and ten-year government bonds. With policy expectations diverging between the Reserve Bank of Australia and the Federal Reserve, the spread between Australian long-term government bond yields and US bond yields has widened, reaching the highest relative level since August 2024. This trend has supported the Australian dollar, making it one of the strongest performing currencies among G10 currencies since September 1. Christopher Wong, a strategist at Oversea-Chinese Banking Corporation, said, "We still believe the Australian dollar will trend higher. As long as global growth remains steady, the US dollar remains subdued, the renminbi remains relatively resilient, and the end of the Reserve Bank of Australia's easing cycle is approaching, these factors will support the Australian dollar." The Reserve Bank of Australia expects the unemployment rate to remain at 4.4% within its forecast period, while job growth is projected to slow in the coming years. The Reserve Bank of Australia's latest forecasts project a cash rate of 3.4% by mid-2026, indicating that there may only be one rate cut between now and June next year. Australia's labor market has been a bright spot in the economy, although it has cooled down from its post-pandemic peak. Nevertheless, the Reserve Bank of Australia's latest assessment sees the employment market as being tight based on indicators such as high job vacancies, a high ratio of vacancies to job seekers, companies facing difficulties in hiring beyond average levels, strong unit labor cost growth, and estimates of full employment models. Data released this week also shows that the Australian economy is strengthening - for the first time in almost four years, optimists outnumber pessimists in the monthly consumer confidence survey, and the size of housing loans in the third quarter reached a historical record (largely driven by investor loans). Data from real estate services firm Colliers indicates that since 2022, retail rents in Sydney's central business district (CBD) have risen by 3% due to the resurgence of tourism, infrastructure upgrades, and growth in luxury goods and dining demand. At the same time, with pedestrian traffic returning to 84% of pre-pandemic levels, vacancy rates in the Sydney CBD have significantly decreased. This is another sign of the economic recovery gaining momentum. Michael Tuck, Head of Retail Leasing & Advisory, said, "We are witnessing positive momentum in the Australian CBD retail sector. With Black Friday and the Christmas trading season approaching, increased foot traffic, the revival of inbound tourism, and improved consumer confidence are expected to further strengthen summer retail performance." However, the strong recovery of the Australian economy has also raised concerns about the possibility of resurgent inflation. Earlier this week, Reserve Bank of Australia Deputy Governor Andrew Hauser stated that policymakers are facing new challenges - as the economy enters a recovery phase, significant supply shortages of capacity could increase the risk of inflation resurfacing.