Unemployment rises to 4.0% putting rate cuts at the February RBA meeting in doubt, AMP's Diana Mousina explains why. Plus, an outlook of local and global share markets with State Street's Clive Maguchu and Commsec's Laura Besarati.
This is Business Now with Edward Boyd.
Hi and welcome to Business Now, thanks to your company today. I'm Edward Boyd. Coming up on the program. Australia's labor market has defied expectations in December, creating more than fifty six thousand jobs during the month. So what are the implications for the Reserve Bank and interest rates? Deana Messina, Deputy Chief economist at AMP, will join US shortly. Global stock markets rally after a positive inflation report was released in America overnight, raising hopes that the US Federal Reserve could ease rates further. We'll break down all the market news with Comsek plus. The global short selling firm Hindenberg Research has announced its closure after spending eight years wiping billions of dollars in value from companies like Adani and Nikola. That's all coming up on today's program. Other stories today should know about US earning season began this week with some of the world's largest banks reporting strong profit results. Overnight profit at Goldman Sachs more than doubled, with the investment bank posting its strongest result in more than three years, and this was due to bankers bringing in more fees from deals. JP Morgan Chase, America's largest bank, reported a record annual profit from rebounding markets in the fourth quarter. City Group's results succeeded expectations, and it launched a major share buy back program. Wells Fargo also impressed investors overnight, and the positive bank results helped lift the overall banking sector, with Bank of America and Morgan Stanley rising during the trading session. JP Morgan Chairman and CEO Jamie Diamond said the US economy has been resilient. Unemployment remains relatively low, and consumer spending stayed healthy, including during the holiday season. Businesses are more optimistic about the economy, he said. Shares in Meyer and Premier Investment jump today after independent expert Kroll released a supplementary report declaring the proposed merger between Meyer and the Uperoll brand's business owned by Premier Fair and Reasonable. The two companies have been under pressure since releasing weaker than expected trading updates earlier this week. Mayer will hold a shareholder vote on Thursday next week, where investors will have the chance to approve the merger. Last year, Meyer proposed to issue new shares to Premier Investments in exchange for Premier's apparel brand's business, which includes the brand's just genes, Portman's, Dotty, and JJ's. The newly merged Meyer entity would own roughly forty eight percent of the share of the stock and Premier shareholders would own the rest of the stock. Kroll's report posted to the Stock Exchanged today says, in the absence of a superior proposal, this merger is fair and reasonable. Meyer and Premier both took off after the report was released. You could see they both finished pretty strongly today. Meya up almost seven point three percent. Mining giant Rio Tinto shipped about three hundred and twenty nine million tons of iron ore from its Pilber operations in the twenty twenty four calendar year, down one percent on the year prior. The global minerals producer said copper production increase thirteen percent thanks to the ramp up of the Oyu Tolgoi underground mine in Mongolia. Rio Tinto also provided an update on the Simando iron ore project, located in West Africa. The Simfur joint venture mine is on track to begin production this year and will ramp up over a thirty month period to an annualized capacity of sixty million tons. The first ore was crushed on New Year's Day, but the challenge remains transporting the ore to port. The six hundred and twenty kilometer railway line is still under construction and the port is yet to be completed. Rio tifto shares well ale pretty flat today. They are only up by twelve cents. Let's see how the stock market finished up today. Local market jumped sharply at the open after a strong performance from Wall Street overnight. All sectors were in the green, led by the banks and property reads. The ASX two hundred finished the day up one point four percent, and that was its best day in about three weeks. Buy now, Pay Later server Zip was a top performer after being upgraded by a broker. Gambling company TAB Corps surged after hiring the head of wagering at the Hong Kong Jockey Club, Michael Fitzsimmons. Other tops included the travel business Corporate Travel Management, building materials maker James Hardy, and the kitchen appliance manufacturer. Brevel was up three point six percent. And we had some viewer feedback yesterday asking for more small caps coverage, So here are some of the top performers from the small Ordinaries index. Computer software company Integrated Research jumped after a profit upgrade. The gold producers Alkane and Challie were higher, along with the tech stock Brainship and karun Gas was up about six percent. Losing value today included Domino's Pizza, the mining company's min Reds and Saint Barbara, the litigation funder Omnibridgeway, and the online bookie points Bet. And that's Markets. In partnership with Comsek, Taiwanese computer chip manufacturer TSMC will release its profit results this afternoon. Let's bring in here Laura Bezerati from Comsek. Laura, this comes at a time when the US is cracking down on computer chip exports.
Good afternoon, ed, that's exactly right. So those results will be out ahead of the US market open. And they're really a key player in the AI space because they do build these AI chips for companies like Nvidia and Apple. So these results are going to be very closely watched by investors to get a pulse on the AI landscape. Now, analysts are expecting its profit to jump by fifty eight percent thanks to surging demand. But look, as you rightfully point out. Earlier this week there was news that the US government will limit AI chip exports, particularly to China, which could be a major headwind for them moving forward. And then of course we have Trump coming into office next week as well, which could see broader tariffs coming into place. So an interesting time ahead for the AI space, it seems, and I think investors will be watching its forward guidance very closely tonight as well.
And Laura, the US inflation numbers they were released overnight. How did they look? Well?
The Wall Street actually reacted very positively to these numbers. The S and P five hundred index was up by one point eight percent, its best day in two months since actually the day after the election day. So that's because inflation came in softer than expected, particularly that core measure, which the Fed watches most closely, cooled to three point two percent. Analysts were expecting three point three percent, So a soft to read there was very welcome and it now has restored the hopes that investors will see two rate cuts from the Fed over the course of twenty twenty.
Five ED Laura, thanks for coming on the show. Australia's economy created more than fifty six thousand jobs during massively beating market expectations. The figures released today by the Bureau of Statistics confirm that Australia still has a tight jobs market and it's creating plenty of jobs despite the weakening economic conditions. The overall unemployment rate during December lifted slightly to four percent. This was due to the participation rate, which is the percentage of people either in work or actively looking for work, soaring back to a record high sixty seven point one percent. Last month's employment gains were seasonally driven by part time workers. About eighty thousand part time jobs were created during December, which offset are near twenty four thousand fall in full time workers. Treasurer Jim Chalmers said the numbers confirmed Australia's economy can still achieve a soft landing.
Now we've shown that we can make substantial and sustained progress on inflation while creating jobs, not sacrificing jobs, and not every country has been able to deliver that. So low unemployment is a very good thing in our economy. It has come at the expanse of getting inflation down. We've been able to do both of those things at the same time to get inflation down and wages up.
Opposition leader Peter Dunnen said record levels of government spending have been prolonging Australia's inflation challenge.
At the moment. The federal government is spending money like a drunken salor and that's what's keeping upward pressure on inflation. So we will cut the government to wasteful spending and we will put downward pressure on inflation, which will reduce not just interest rates but the inflationary pressures as they are in our economy at the moment.
Well, for more on this, I'm joined by AMP Deputy Chief Economist Diana Messina. Diana, thanks for your time. Look, most of our viewers are probably wondering why the unemployment rate increased in December despite the economy creating more than fifty six thousand jobs.
It's sort of a bit hard to explain, I think even for economists. Basically, what's been going on in the labor market, not just in the month of December, but really over the whole of last year, was that we've had this record level of participation in the workforce, and that includes people who were both employed and people who are looking for work. Therefore unemployed so as a share of the overall population that's aged over fifteen years old, we've now got about sixty seven percent of that group engaged in the labor force somehow, either through working or through looking for work. When that ratio increases, you actually need more people to be employed just to keep the unemployment rates steady. So even though we had pretty good growth in jobs over the month of December, because the labor force participation rate increased, that's what made the unemployment rate rise a tad.
Yeah, you mentioned the growing workforce and migration in twenty twenty four. For Australian population growth was very high as well. I guess it is kind of impressive for our economy that most of those people that came to Australia seem to find work pretty quickly.
Absolutely right. I mean, we have had this massive growth in the supply of labor. So if you just look at the number of people who were rolling into that working age population, those numbers are running up by about forty or fifty thousand people every single month. But the fact of the matter is that that supply of labor is still being matched by demand for that labor. So clearly all those immigrants that are coming in are still being matched to a job, and a lot of the time those immigrants are also coming in on a skilled type of visa or some type of visa, so more often than not they're already being matched to a job as soon as they arrive into Australia.
And looking at some other of the big leading jobs indicators, such as job vacancies and job ads, I mean, is this all really saying that the job's market is still really strong.
On the broad measure of those leading indicators, I would say yes, the labor market is still holding up. We saw a bit of a decline in those leading indicators, so things like job vacancy's, the rate of hiring, and what business surveys are telling us about their employment intentions. We did see a bit of slowing across the board in twenty twenty four, but in the past few months lot of those indicators have stabilized and they tend to move quite closely in line to ours work. So I think that going from here, employment growth is actually probably going to stabilize and the unemployment rate may not actually rise too much. Further, we were anticipating the unemployment rate to get to four and a half percent, but I think it's quite conceivable that it may only reach four point two or four point three percent in the cycle, which is still incredibly low for Australia.
Yeah, the Reserve Bank, in its own forecasts from the recent statement of monetary policy November, have the unemployment rate reaching four and a half percent by the end of this calendar year. But do you think they may need to retweak their forecast now and the true figure could actually be lower than that.
Then that's definitely the risk from here. I mean, we still do have a long time to go before they before we get to those ends of year forecasts, and we could see things things changing by but at least in the short term, the Reserve Bank may need to revise down their unemployment rate forecasts just slightly. And that has really been the story over the past six or twelve months as well, this continued strength in the labor force, which has taken all economists by surprise, I'd say. But what's really interesting, I think is that we talk about what is this neutral rate of unemployment, the unemployment rate that doesn't put any upwards pressure on inflation. I think what the data keeps suggesting and telling us is that that neutral rate of unemployment is actually a lot lower than where we were expecting it to be before COVID, it was probably at about five percent or so. Now it's probably closer to four percent. So anything above four percent is putting downward pressure on the economy. But with the unemployment rate at four percent right now, it's sort of at its neutral level, all right.
Now, look at the Reserve Bank's perspective here, how are they going to react to today's figures? Can we still is there still potentially a chance for rate cut in February?
I think there is the chance of a rate cut in feb by zero point two five percent, so taking the cash rate to four point one percent, But I think the risk is probably somewhere about fifty percent. Right now, the financial markets are pricing in up to eighty percent chance of a rate cut in February. I think that that's a bit too high. I mean, the if you just look at the labor force in itself, it's not telling us that there is a pressing need right now to cut interest rates. But that does stand at odds with the broader set of activity data, particularly the GDP figures that show us that Australian economic growth is running at its lowest level in nearly thirty years outside of the pandemic, really, so I think that there is this need to help the economy out. But you can obviously see a situation where the Reserve Bank decides to push back the decision to cut rates. I think what will really cement the view for a rate cut is if we get a week December quarter inflation print and that comes out in two weeks time, so we just have to wait and see. I'd say the risk of a rate cut is about fifty percent in feb If it's not in February, then they may cut in May.
Yeah, that December quarter CPI number. Do you think we could see trim mean inflation four within the RBA's target band.
On an annualized basis. I think that we will actually see that quarterly trim mean in the Reserve banks target band, but on a year on year change, which is another way that economists look at things, It's hard to see it ticking down within that two to three percent target band, but I think that the trim mean number will actually be quite low. We're looking for about point five percent over the quarter. If you annualize that that actually comes out at two percent, So the trim mean numbers should move more within the RBA's liking and within that target band. Really in line with what some of about global peers have shown over the past six months.
And just quickly, how much of an X factor is the potential tariffs the incoming Trump administration might put on goods to push up inflation.
I mean that provides an upside risk to inflation. But at the same time, if you if you go into a situation where we get tip for tag global trade war, that's actually a negative translation. So I think right now it's just too early to tell.
Deana Massina, Deputy Chief Economists at AMP, Thanks for coming on the show.
Thanks ed.
After the break, State Street Global Advisors joins us to give us an update on the markets and the trends they're expecting to see in twenty twenty five. Welcome back. The Aussie stock market performed well last year, with the ASX two hundred rising roughly seven and a half percent, but over the holiday season, global and OSSIE equity and bond markets were generally lower, continuing the weakness we saw from early December. Join me now is Clive Maguchu from State Street Global Advisors, Clive, thanks to your time. Last year was pretty good for the market, apart from the last couple of weeks. What happened there at the end that really turned things around.
Oh yeah, when you look at the last couple of weeks of December and the first couple of weeks of this year, we saw, you know, equity and bond markets generally low across the board. So US equities were among the worst hit, falling about three and a half percent overall, and about four and a half percent when you look at the tech sector. We also have Chinese stocks falling sharply, about five and a half percent lower, but you know, Australian, Europe and Japanese stocks did a bit better, falling just about one percent over the year. So we had a number of surprising developments that took our markets by surprise. So firstly, we had the Fed changed their tone really and express concern around stickier inflation. And then we had a very strong US jobs report that cemented market expectations that the FED would not be cutting rates as much as they'd initially expected. So for context, the market had the FED cutting rates about three times down to one after that jobs report, and then add to this, we also saw more speculation around the incoming Trump administration's policies around immigration and tarifts that could have an inflation effect.
Yeah, is that what you see is the big risks for investors this year? Geopolitics, things like the potential for tariffs on global trade from the new Trump administration.
Yes, I mean, we do see a number of risks on the horizon, but I should start by saying that our base case expectation is for that soft landing, But we do see a number of risks on the horizon. The first one that you mentioned there is obviously the geopolitical risk. We think there's going to be a lot of geopolitical tensions over the next year, and a lot of headline risk around geopolitical events as well, headlined by obviously the US China trade tensions. The second one that we see is obviously two sided policy risks from the incoming Trump administration as they sort of try to balance the campaign platform of tariffs versus tax breaks. We also see a number of risks related to the very high levels of gunment debt that we've seen increased significantly since the end of COVID, So for context there, we think maybe by the middle of this year we'll see more worries been expressed around the sustainability of these gunment debt levels, particularly when we have this current high interest environment.
One thing we've seen as well the past few weeks has been the falling Aussie dollar here in Australia. It's lost a substantial amount of value, and I think in the past couple of hours it's dropped off a bit today too, now below sixty two US since, I mean, how much of a risk for our economy here is that falling dollar.
Well, the Oussie dollar has been very weak for for a while now, and a lot of that is actually not due to any Aussie specific factors. The US dollar has been the key factor there and a lot of the geopolitical tensions and so on that have driven more assets into US assets and driving the US dollar stronger. So we think the Aussie dollar is going to remain weak for the foreseeable future, as that US dollar strength doesn't seem to look like it will abate anytime soon. But no further big decreases from here, we think.
All right. In the Australian equity market, I mean, it's obviously not going to have as good as as year as last year, but it seems like it should still be an okay twelve months of trading in twenty twenty five.
Well, we actually favor US equities are going into twenty twenty five. We just think that US equity is a the best place to deliver what markets value the most, and that's profitability and growth, and we think the US large cap names will be the ones that continue to lead the market. We also think that you know, we might see performance broadening out to US small caps as well, given that these are more cyclical sectors, slight financials and energy that might actually benefit from some of the deregulation we expect. For Australia, we think that's going to be one of the markets that's going to be a laggard. We think there's just a trifecta of you know, negative things that are impacting the Australian equity market. From the high valuations, particularly among the big banks. We also have you know, the weak China outlook and a weak domestic consumer as well, so that's holding back the Australian equity market in our view.
Clive Magouchu from State Street Global Advisors. Great to have you on the program this afternoon.
Okay, great, thanks to finish up today.
Global short selling firm Hindenburg Research is closing after eight years of shorting major companies like the Indian base to Dani Group and the American electric truck maker Nicola. The business, named after the nineteen thirty seven Hindenburg airship disaster, was founded by Nathan Anderson in twenty seventeen. This morning, he said the time was right to close down. We've had days of bizarre, hilarious and ridiculous stories and we've had a lot of fun amidst the pressure and challengers. It has been the adventure of a lifetime, he said. Hindenberg spent years taking short positions in large companies and publishing reports which helped wipe billions of dollars in value off them. In twenty twenty, at launched an attack on the truck maker Nicola, accusing the company of deceiving investors about its technological capabilities. The founder of Nikola was eventually charged and sentenced to four years in prison, and in twenty twenty three, Hindenberg accused Indian conglomerate Adhani of using offshore tax havens improperly, which it denied. This report caused a DANNI chairman, Guta Mdani's wealth to plunge by roughly eighty billion US dollars. That's all for today's program. Visits our returns more or thirty. Thanks for your company today. We'll see you tomorrow