Australia's Economy: Strong Jobs, High Inflation, Weak Sentiment

The Australian economy, influenced by global and domestic dynamics, is showcasing mixed signals across labor markets, inflation, and consumer sentiment. Recent data highlights resilience in employment, persistent inflationary challenges, and cautious optimism for monetary policy adjustments.

Australia's labor market demonstrated surprising robustness in December. Employment grew by 56,300, significantly exceeding expectations of 15,000, driven primarily by a surge in part-time jobs. The participation rate reached a record high of 67.1%, and annual job growth accelerated to 3.1%, double the historical average. Despite the rise in the unemployment rate to 4.0% from 3.9%, this reflects increased workforce participation rather than underlying weakness. However, wage growth remains subdued, suggesting limited inflationary pressures from the labor market.

Inflation continues to challenge policymakers. November's consumer price index (CPI) rose 2.3% year-on-year, slightly above expectations, with underlying inflation at 3.2%, still above the RBA’s 2-3% target. Key contributors included food and housing costs, though trimmed mean inflation's decline from 3.5% offers hope for easing pressures. Analysts believe these figures increase the probability of a rate cut by the RBA as early as February, though the central bank remains cautious. Current interest rates at 4.35% are deemed restrictive enough to curb inflation while sustaining employment gains.

Consumer sentiment weakened further in January, with the Westpac-Melbourne Institute index dipping 0.7% to 92.1. Financial stress due to high mortgage rates and cost-of-living pressures dampened confidence, particularly regarding family finances. While spending surged during November's Black Friday sales, retail sales growth of 0.8% fell short of expectations. Analysts caution that this seasonal boost might be offset by weaker December spending. Despite tax cuts and slowing inflation, consumer spending remains underwhelming, posing challenges for economic growth.

Australia’s trade balance exceeded expectations in November, driven by a 4.8% increase in exports. Strong commodity demand, especially from China’s stimulus-backed recovery, played a pivotal role. Mineral fuel exports also surged due to colder weather in Asia and Europe. However, rising imports, particularly in business investment, moderated the overall surplus.

The RBA faces a delicate balancing act. While inflation appears to be easing gradually, persistent strength in the labor market complicates the case for immediate rate cuts. Market expectations suggest a probable rate reduction in 2025, but an earlier cut remains possible if inflation data and retail sales signal further economic softness. Additionally, Australia’s consumer spending trends and external trade performance will be critical in shaping monetary policy and broader economic trajectories.

The U.S. dollar's recent strength might wane as analysts from BCA Research warn that it appears overbought. While the dollar could maintain short-term momentum, structural and cyclical indicators suggest potential vulnerability. The analysts, who remain cautious about the dollar, recommend alternatives such as the Australian dollar (AUD). Factors driving optimism for the AUD include a robust domestic economy, a strong labor market, and its pivotal role in global commodity markets, especially in exports to China. Australia’s high-quality iron ore, essential clean energy metals like nickel and cobalt, and liquefied natural gas (LNG) position the AUD for long-term growth. Despite some domestic challenges, such as consumer debt, the currency's valuation at historic lows implies limited downside barring significant global disruptions.

As Donald Trump prepares for his second presidential term, markets anticipate a flurry of executive orders that could reshape policy, with early effects likely observed in foreign exchange and Asian trading. The U.S. dollar has rallied since September due to strong economic data and Trump’s campaign momentum, although it held steady on Monday amid cautious investor sentiment. A surprising twist included the launch of a digital token by Trump, which surged in value, adding an unconventional element to the week's economic developments.

Recent data reflects mixed signals in the U.S. economy. Single-family homebuilding reached a 10-month high in December, with permits for future construction also rising. However, rising mortgage rates and an oversupply of housing may temper further recovery. Manufacturing output also surged, largely driven by resumed production at Boeing following a major strike. Yet, looming tariff policies under Trump's administration could raise raw material costs and potentially disrupt this recovery.

Data for Technical Analysis (1H) CFD AUD/USD

Resistance : 0.6211, 0.6213, 0.6218

Support : 0.6201, 0.6199, 0.6194

1H Outlook     

Source: TradingView 

Buy/Long 1 If the support at the price range 0.6191 - 0.6201 is touched, but the support at 0.6201 cannot be broken, the TP may be set around 0.6214 and the SL around 0.6186, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 0.6211 - 0.6221, TP may be set around 0.6230 and SL around 0.6196, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 0.6211 - 0.6221 is touched, but the resistance at 0.6211 cannot be broken, the TP may be set around 0.6201 and the SL around 0.6226, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 0.6191 - 0.6201, TP may be set around 0.6180 and SL around 0.6216, or up to the risk appetite.       

Pivot Points Jan 20, 2025 02:37AM GMT