September employment figures released by the Australian Bureau of Statistics (ABS) showed softer growth than anticipated, with only 6,700 new roles added, primarily in part-time jobs which rose 46.5k while full-time employment decreased -39.9k.
This falls short of the projected 20,000 rise. Consequently, the participation rate dropped to 66.7% from 67%, and the unemployment rate decreased to 3.6%, continuing its steady rate since June last year.
This data aligns with the Reserve Bank of Australia’s recent outlook suggesting the labour market is beginning to cool somewhat, although remains relatively tight. RBA’s new Governor, Michele Bullock’s recent comments further emphasised the challenges in curbing inflation amidst low unemployment.
Following the release, the Australian dollar is -0.25% weaker while the policy-sensitive 3-year bond yield is 5 basis points higher at 4.22%, although both are mostly driven by moves overseas overnight. Next week’s CPI data is eagerly anticipated, especially as Governor Bullock expressed a low tolerance for unexpected inflation increases. Given this low tolerance, next week’s official inflation data for Q3 will be key in determining whether or not the RBA hikes again, with expectations for a 5.2% increase in headline prices over the year and a 1% increase over the quarter.
Despite the RBA maintaining a 4.1% interest rate in October, experts are split on future predictions. Some foresee a hike to 4.35% by November, while others believe the peak has been reached as inflation trends appear favourable. In our view, the latest figures do little to sway our outlook that we are in an environment more akin to a pre-GFC world, characterised by stronger economic growth and higher levels of inflation than that of the period between 2010-2020. While interest rates will remain a headwind for equities and bonds, the flip side is that should the labour market remain resilient and economic growth robust, this should translate into solid corporate earnings, counterbalancing the effect of interest rates.
In such an environment, we would expect segments within the equity market and fixed-income markets to be varied. Within equities, we continue to favour exposure to large capitalisation stocks, such as our Rivkin ASX Blue Chip portfolio given relatively low valuations, strong dividend yields and free cash flow. Within the fixed income space, we favour floating rate interest securities, such as those within the Rivkin ASX Income portfolio given their capital value is less sensitive to changes in interest rates, and given the outlook for interest rates remaining higher for longer, are benefiting from the current environment with the portfolio yielding around 7.75% on a gross basis.