UOB’s Lee Sue Ann notes that Australia’s May labour data show a rebound in headline employment but softer underlying conditions, with rising underemployment and falling hours worked. She argues this mix points to moderating activity and emerging slack, supporting UOB’s base case that the Reserve Bank of Australia keeps the cash rate at 4.35% through at least 2Q27 while staying data-dependent.

Labour softness underpins steady RBA stance

"The latest employment numbers largely reflect a reversal following Apr’s weakness rather than a renewed strengthening in labour demand. While the headline rebound points to ongoing resilience, the underlying mix is consistent with a moderation in activity. This aligns with other recent data showing softer growth momentum, alongside still-elevated but gradually easing inflationary pressures."

"Labour market conditions remain a key input for the RBA, particularly as it navigates the trade-off between returning inflation to target and sustaining employment. The latest data broadly supports the RBA’s expectation of a gradual easing in labour market tightness."

"RBA forecasts continue to point to a gradual rise in unemployment over the medium term as growth slows below potential."

"Earlier this month, the RBA opted to hold the cash rate at 4.35% following three consecutive hikes, citing the need to assess the lagged impact of tightening. The May labour market report does little to challenge that stance."

"In the context of still-elevated but sticky core inflation and slowing growth, this supports our base case that the RBA will remain on hold at 4.35% while adopting a cautious, data-dependent approach. A further rise in unemployment or clearer signs of weakening labour demand in coming months would strengthen the case that policy is sufficiently restrictive and reduce the likelihood of additional tightening."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)