Australian labour market conditions deteriorated sharply in April, with employment falling by 18,600 while unemployment jumped by 33,000, pushing the jobless rate to 4.5%. According to reports from Investing.com India, this unemployment rate came in above the 4.3% level that was expected by market consensus, which had predicted the rate to hold steady. The softer report also included a sharp 0.9% increase in hours worked per employee, suggesting those who remained employed were working longer hours. However, the April report was not unambiguously weak, with the underemployment rate edging down by 0.1 percentage points to 5.8% even as unemployment climbed to 4.5%, an unusual divergence that may indicate firms are trimming headcount while continuing to lean heavily on existing workers.
The economic deterioration extended beyond employment data, with manufacturing and services sectors showing significant weakness. As reported by S&P Global, Australia's Manufacturing Purchasing Managers' Index (PMI) declined to 50.3 in May from 51.3 in April, while the Services PMI eased to 47.7 from 50.7, sliding into contractionary territory. Consequently, the Composite PMI fell to 47.8 in May, down from the previous month's reading of 50.4. The flash composite PMI had already flagged the second contraction in three months, with business sentiment matching its pandemic-era low, providing a technical counterpoint to the employment data.
The softer labour market report has fundamentally altered RBA policy expectations, with the probability of an RBA August hike collapsing from 81% to just 42% following the jobs data release. As reported by InvestingLive, National Australia Bank pushed its RBA hike call from June to August, while markets moved to no longer fully price any further RBA tightening for the remainder of 2026. The April report was not unambiguously weak, with the underemployment rate edging down by 0.1 percentage points to 5.8% even as unemployment climbed to 4.5%, an unusual divergence that may indicate firms are trimming headcount while continuing to lean heavily on existing workers. The report also landed just days after RBA chief economist Sarah Hunter warned that elevated capacity constraints and domestic cost pressures could amplify the inflationary impact from higher oil prices stemming from the Iran war, suggesting labour market conditions may not be as tight as previously thought.
Market pricing for another 25bp increase at the June meeting slumped from around 15% before the release to just 6% afterwards, having been as high as 22% last week as traders reacted to rising oil prices and escalating tensions in the Gulf. The collapse in June hike pricing has also sparked a reversal in Australian three-year bond futures, with the price breaking above both the 50-day moving average and downtrend resistance while clearing horizontal resistance at 95.44. Momentum indicators are improving, with RSI pushing back towards 60 while MACD continues to grind higher, hinting downside momentum may be fading. AUD/USD fell in response to the weak employment report and deteriorating rate hike expectations, with the pair remaining vulnerable to further downside if the US dollar strengthens. However, the pair has caught a bid into the jobs report as traders weigh hawkish RBA minutes and June hike expectations, with the pair pulling back from rising wedge resistance towards 0.7000 support.
On the geopolitical front, Iran's newly formed Persian Gulf Strait Authority declared a controlled maritime zone across the Strait of Hormuz, requiring all vessels to seek authorisation before transit, a move that encroaches into waters the UAE and Oman regard as their own. The Iranian Foreign Ministry said it had received US viewpoints on the conflict and was studying them, while the Pentagon confirmed plans for a high-level delegation to Beijing to lay the groundwork for Defence Secretary Pete Hegseth to visit China. These developments add complexity to the already challenging economic outlook for Australia, with the ASX 200 appearing to be in the process of putting in a market bottom despite the mixed signals from employment data and geopolitical tensions.
