Australia’s Surprise Job Gains Boost Case for RBA Rate Hike

Economic Overview - Australian unemployment unexpectedly fell to 4.1% from 4.3%, surpassing economists' expectations of 4.3% [1] - Employment increased by 65,200 jobs, significantly higher than the anticipated gain of 27,000 [1] Market Reactions - Yields on three-year government bonds reached their highest level since November 2023, and the Australian dollar strengthened to its strongest position in over a year [2] - Money markets are now pricing in a nearly 60% chance of a rate hike in February, up from less than one-third prior to the jobs report [2] Central Bank Considerations - The upcoming quarterly inflation data is critical for policymakers ahead of the Reserve Bank of Australia's (RBA) policy meeting on February 2-3 [3] - The RBA may need to decide between maintaining the current key rate or increasing it to address renewed inflationary pressures [3] Analyst Insights - The labor market data has removed a barrier for the RBA to consider a rate hike in February, with expectations of a 0.9% rise in consumer prices for the quarter [4] - The RBA previously cut the key rate by 75 basis points to 3.6% between February and August last year, but further easing is now deemed unlikely [4] Currency Performance - The strong employment data has contributed to a 1.8% gain in the Australian dollar this year, making it the best performer among Group-of-10 currencies [5] - Money markets are fully pricing in a rate rise for May, with over a 90% chance of two hikes occurring this year [5] Inflation Commentary - RBA Deputy Governor Andrew Hauser described inflation as "too high" and indicated that the last cut of the easing cycle has likely occurred [6] - The RBA is adopting a patient approach to controlling inflation while preparing for potential rate adjustments [6]