Jobs Are Softening. Inflation Sets the Terms.

The September labour force figures, released by the Australian Bureau of Statistics on Thursday 15 October, were softer than the market expected.

Employment fell by 39,300 in seasonally adjusted terms. Economists had expected a rise of around 20,000, according to AAP. The unemployment rate rose to 4.7 per cent, and August was revised up to the same level, the highest since October 2021. The participation rate fell 0.2 percentage points to 66.8 per cent, and underemployment rose to 6.3 per cent.

The natural reading is that this takes pressure off the Reserve Bank. That is partly right. It is not the whole picture.

What the data actually says

The detail is more mixed than the headline. Part-time employment fell by 73,700, while full-time employment rose by 34,400. Total hours worked rose 0.1 per cent in the month. Over the year, employment and hours are both up a little over 1 per cent.

The ABS itself urges caution. Its new Supplementary Survey method may leave some residual influence in the September seasonally adjusted figures, and it continues to recommend trend data as the best guide. On a trend basis, unemployment held at 4.6 per cent and employment grew 0.1 per cent.

So the direction is clear, even if the size of one month's move is not. Unemployment has risen 0.6 percentage points since the start of the year, according to AAP, and is already above the RBA's forecast of 4.5 per cent for the December quarter. The ABS noted a higher share of people remaining unemployed this September than in recent years.

By state, Queensland's seasonally adjusted rate was steady at 4.5 per cent. New South Wales rose to 4.7 per cent and Victoria sat at 5.1 per cent.

Why one soft month may not decide November

The Board lifted the cash rate to 4.60 per cent on 29 September, its fourth increase this year, and said it would raise again if needed. Its reasons went well beyond jobs: global energy prices much higher than assumed, rising prices for technology goods, firms passing on cost pressures, and inflation outcomes stronger than expected.

The minutes, released on 13 October, added an important point. Staff judged that the July inflation surprise more likely reflected domestic capacity pressures than pass-through from the Middle East conflict. AAP also reported that staff were increasingly concerned that the unemployment rate consistent with stable inflation has risen because of weak productivity. If that is right, a jobless rate of 4.7 per cent may not represent as much spare capacity as it would have a few years ago.

Before Thursday's release, the major banks were already split. ANZ and Westpac expected a further increase on 3 November. CBA and NAB expected a hold, with a hike as a live risk. After the data, several economists said the case for a November move had weakened but had not gone away. Oxford Economics Australia's Oscar Guth said the result gives the RBA more room to be patient, and his firm sees the next increase in the first quarter of next year.

The calendar matters here. The September-quarter CPI is released on 28 October. The Board meets on 2 and 3 November. Annual headline inflation was 4.0 per cent in August, with trimmed mean at 3.6 per cent for a third straight month. One quarterly number will carry a great deal of weight.

What it means for borrowers and lenders

The RBA's October Financial Stability Review gives a useful baseline. It estimates that around 2 per cent of variable-rate owner-occupier borrowers are in a cash flow shortfall, where income does not cover scheduled repayments and essential expenses. Most of them have savings to cover that gap for at least six months. Loans in hardship arrangements have increased but remain low.

The Review also tests a very adverse scenario, which ABC News summarised as unemployment rising to 6.3 per cent, inflation near 7 per cent and a cash rate of 5.6 per cent. In that case the share of mortgagors in shortfall rises to about 5 per cent, just above the 2023 peak. About two-thirds of those would still have six months of buffers.

That is reassuring at the system level. Individual files do not live at the system level. The Review notes that smaller businesses and those in energy-intensive or cyclical industries with fewer buffers, such as transport, hospitality and construction, are more vulnerable to cost pressures, particularly if demand weakens significantly. Lower-income borrowers are also more likely to be in a cash flow shortfall.

What I take from it

A few observations, offered as personal views.

First, read the trend, not the month. One volatile release, during a period of methodology change, is a weak basis for a strong conclusion either way.

Second, a softer labour market and a higher rate path can coexist for a while. If the RBA believes there is less spare capacity than the unemployment rate suggests, inflation will continue to set the terms.

Third, for anyone structuring finance, income resilience is becoming as important as rate assumptions. Servicing tested against a higher rate is standard. Servicing tested against softer income, longer sales periods and slower leasing deserves equal attention.

None of this is a forecast or a call on rates, any borrower or any lender. The jobs market is cooling gradually. Whether that is enough for the Reserve Bank will be clearer on 28 October.

Personal views, not financial advice.