Bitcoin Halving Event In Less Than 3 Months Time, What Could Happen?

Investors continue to come back to their senses and the latter involves trimming the interest rate cut expectations that went ahead of themselves over the past few months. Yesterday, the Federal Reserve's (Fed) Beige Book survey suggested that resilient consumer spending during the holiday season helped propel the US economy, and another solid rise in the US retail sales confirmed that spending in the US didn't slow by the end of last year. On the contrary, the latest data printed its highest pace in three months. As such, robust economic data added to the thinking that, yes, maybe March is too early for the Fed to announce the first rate cut; there is no apparent reason for the Fed to rush to the rate cuts as early as in March. The Fed will likely start cutting in the H1 but March seems overly optimistic given the ongoing strength of the economic data. The probability of a March cut fell to around 60% from around 80% at the start of the year, the US 2-year yield advanced 25bp since the start of the week, the 10-year steadies above the 4%, the US dollar index is pushing higher, the S&P500 comes under fresh selling pressure near peak, and volatility is rising. Given how far the Fed doves and the market bulls pushed their rate cut bets over the past months, there is room for further downside correction in both stock and bond markets, and potential for a further recovery in the US dollar against most majors.

Central bankers, bank CEOs and other influential figures continue to talk in Davos. They continue to push back on the interest rate cut expectations, they highlight the need to consider the upside risks for inflation due to the rising geopolitical tensions and they continue to warn that the market's optimism regarding the rate cuts may have the opposite impact on rate policies: too much optimism could delay the rate cuts. European Central Bank (ECB) Chief Christine Lagarde warned in Davos yesterday that overly optimistic rate cut expectations don't help the central banks' fight against inflation – as they loosen the financial conditions prematurely. She, however, hinted that the ECB will likely cut rates by, or in summer. And this was the first time we heard the ECB Chief loudly considering rate cuts.

The market and the central bankers have started to move toward each other, but the time gap between when investors price in the first cuts and when central bankers contemplate rate reductions should continue narrowing to find an optimal balance and that should involve a deeper downside correction in stock and bonds, and a further recovery in the US dollar.

The EUR/USD tested the 200-DMA to the downside yesterday and price rebounds could be interesting opportunities for building fresh shorts targeting the 1.0770/1.08 range. Cable is better bid above the 50-DMA after a surprise rebound in the UK's December inflation numbers weakened the Bank of England (BoE) doves' hands yesterday. Cable is testing the 1.27 offers, with a limited upside potential, however, given that the Fed rate cut expectations are being cut, and when the Fed is in play, the other central bank expectations must wait their turn to speak up. In Japan, the USD/JPY advanced to 148.50, a move that no one saw coming by the end of last year when the Bank of Japan (BoJ) normalization bets started fueling long positions in the Japanese yen. Data released this morning showed that the Japanese core machinery orders fell 5% in November, calling for a supportive BoJ, rather than a rate hike.

Earlier this week, China printed a 5.2% growth for last year – not a major achievement, mind you, as the 5% rebound from the pandemic crash matched nothing better than a meagre 2% growth compared to a non-Covid year. Industrial production was better than expected in December while retail sales grew slower. Chinese equities barely reacted to the news of a trillion-yuan worth stimulus earlier this week. The selloff in the CSI 300 accelerates as the focus remains on developing deflation and worsening property crisis. The Aussie feels the pinch of soft China, soft jobs figures and stronger US dollar. The AUD/USD sank below the 200-DMA and is preparing to test the 100-DMA, at 0.6510, to the downside. The AUD/USD outlook turns neutral from positive, the only thing that could slow the Aussie's selloff against the greenback is technical indicators hinting that the pair will soon step into the oversold conditions.

In energy, crude oil is better bid and the barrel of American crude is testing the $73pb – again this morning on the Red Sea tensions and on OPEC forecast that global oil demand will grow by a robust 1.8 mio barrels per day next year, exceed growth in supplies and keep the market in deficit. Of course, the OPEC forecasts should be taken with a pinch of salt as they have an interest in making the numbers look in favour of them. But what's real is the sharp decline in shipping transits through the Red Sea region, which will continue to push the shipping costs higher, could squeeze the energy markets and throw a floor under the oil selloff near the $70pb level.

European markets posted their 3rd successive daily decline as markets continued their New Year hangover, after the pre-Christmas euphoria of what was perceived as a December rate guidance pivot from the Federal Reserve.

The FTSE100 had its worst day since August sliding to its lowest levels since late November, dragged down by a combination of poor performance from real estate, basic resources and energy after disappointing Chinese economic data, and the prospect of rate cuts getting pushed further into 2024.

In the last few days, we've seen a concerted effort from assorted central bankers in Europe, as well as the U.S. to dial back the expectation of early rate cuts, while a surprise uptick in UK inflation and some solid U.S. retail sales numbers torpedoed the idea that we would see early rate cuts in March.

This recalibration on rate cut expectations has seen bond yields surge, pushing UK 2-year yields back to where they were when the Bank of England last met, while U.S. 2-year yields have rallied by 22bps in the 2 trading days since last Friday's close.

This week we've heard from the likes of the Bundesbank's Joachim Nagel, Austria's Robert Holzmann and ECB President Christine Lagarde all pushing back on the idea of an early rate cut, although Lagarde did hold open the possibility of a summer rate cut as she looked to keep the doves onside.

Yesterday's U.S. retail sales showed that the U.S. consumer had lost none of its appetite to go out and spend rising 0.6%, while the retail sales control group, which is a key component of U.S. GDP, rose 0.8%, and November was revised up to 0.5%.

This suggests that the U.S. economy ended the year on a strong note and pretty much kills the prospect of a March rate cut, with markets now repricing for June.

We already know that the U.S. labour market is showing few signs of cracking with today's weekly jobless claims set to rise slightly to 205k from 202k, while continuing claims are also at 3-month lows.

While European markets got clobbered yesterday U.S. markets losses were fairly contained despite the sharp rebound in yields, and the U.S. dollar which initially rallied strongly to one-month highs, gave up most of its gains to close flat on the day.

There may be some hope of a respite despite some weakness in Asia markets although we still look set to see another soft open for European markets.

EUR/USD – found support at the 200-day SMA at 1.0840 yesterday. A break below here and the 1.0800 level targets the 1.0720 area. The main resistance remains at 1.1000.

GBP/USD – currently holding support at the 1.2590/1.2600 area and 50-day SMA keeping the upside potential intact. We need to get above the highs last week at 1.2800 to maintain upside momentum. Also have support at the 200-day SMA at 1.2550.

EUR/GBP – slid towards trend line support at the 0.8565/75 area, while we have resistance at the 0.8620/25 area last week. We need to see break either side to signal the next move, with further resistance at 0.8670 and the main support at the December lows at 0.8545.

USD/JPY – achieved the move to the 148.50 level with further gains towards 150.00 a real possibility. Pullbacks likely to find support at the 146.75 level cloud support as well as the 50-day SMA and the highs last week at 146.40.

A year ago, many economists predicted a U.S. recession in 2023. But by now, U.S. inflation has fallen sharply. Currently, markets believe that the economic downturn will be avoided in 2024.

According to the results of a survey of 71 economists, economists expected a sharply lower probability of recession this year. The probability fell from 48% in October to 39% at the beginning of the year. At the time when economists reduce bets on a U.S. recession, "Bond King" Jeffrey Gundlach said there is a 75% chance of a recession in the U.S. this year.

Consumer spending accounts for about 70% of the U.S. economy. Consumers had been "doing their best to spend" last year, that's why the U.S. GDP grew well in 2023 despite rising prices.

The U.S. Bureau of Labor Statistics released the latest U.S. headline inflation data on January 11, local time, which rebounded more than expected, while the core inflation rate fell less than expected. U.S. CPI rose 3.4% year-on-year in December, the highest increase in three months; it rose 0.3% from a month earlier. Core inflation, which excludes food and energy costs, increased by 3.9% year-on-year and by 0.3% month-on-month, in line with expectations and the previous reading.

Housing, commodities and healthcare were the main drivers of inflation in December, with housing being the most important factor holding back the decline in inflation. Housing accounts for 35% of the CPI in the U.S. The housing index was up 6.2% year-on-year in December, and accounted for two-thirds of the total increase in core inflation. Although it has fallen from a peak of 8.2% in March 2023, it would need to decline to 3.5% for inflation to come down to the 2% target. However, given that house prices are beginning to rise, there is the potential for rentals to move further upwards.

Other core services excluding housing "rose across the board". Health care, auto insurance and airfare prices, the Fed's main focuses, rose. Health care rose by 0.6%; motor vehicle insurance continued to rise by 1.5% in December after rising by 1% in November. For the year as a whole, this item increased by 20.3% year-on-year, the fastest growth in the past few decades; however, the increase in airfares seemed to be "justified" by the fact that December is the peak holiday season.

Core commodity prices were under pressure. The "disinflationary" momentum in core commodities, the main driver of easing inflationary pressures over the past year, appeared to be fading. Both new and used car prices increased in December, and used car prices continued to rise by 0.5% in December month-on-month after rising by 1.6% in November. The current supply chain pressures associated with the Red Sea are starting to show up in global shipping costs, and if this risk expands, core commodities may face further upward pressure.

It's a bumpy road for U.S. inflation to back down. Both year-on-year and month-on-month data exceeded expectations in December. Every component of core inflation, the central bank's primary concern, also rose, pushing a short-term rebound in inflation.

U.S. non-farm payrolls increased by 216,000 in December 2023; the unemployment rate was 3.7%; the labor force participation rate was 62.5%; and average hourly earnings rose 4.1% year-on-year and 0.4% month-on-month.

Typically, the tighter the labor market, the greater the risk of rising inflation. The U.S. labor market remains tight for now. While it shows signs of cooling, the pace is slower than expected; some sectors are slightly weaker, but the number of job openings is still far from balanced.

The rapid recovery in consumption and the slow recovery in the job market are the main reasons for the tight labor market last year. Currently, the number of job openings has come down, but the gap between job openings and job supply is still too large, so employment is still expected to remain good in the first quarter.

The U.S. labor market is expected to continue to come into better "balanced", the supply and demand gap is likely to keep narrowing. With strikes being resolved, workers have returned to work. Moreover, the November JOLTS data show that rates for hires, discharges and quits continued to decline. The "demand-supply" gap in the labor market gradually narrowed, and the labor market continued to come into a better balance.

U.S. wages increased by 4.1% by the end of 2023. Wages in non-farm private firms continued to rebound, with the average hourly earnings rising to 0.44% month-on-month from 0.35% in November and to 4.1% year-on-year from 4.0%. They were significantly above the suitable 3%-3.5% wage growth implied by the 2% inflation target. The non-farm workweek edged down 0.1 to 34.3 hours. The rebound in hourly earnings growth indicates that household income kept growing fast. As inflation falls, the real income growth will continue to support household consumption in the near term.

Looking ahead to 2024, the U.S. economy may turn downward in the near future due to high interest rates and lower demand; in the medium and long run, the U.S. economy is expected to turn upward, increasing the "soft landing" probability.

In 2024, U.S. real GDP is expected to grow by 1.6%, and U.S. real private consumption is expected to grow moderately by 1.5%, with the main support coming from residents' wage income. Consumer spending will be very strong as it has returned to pre-pandemic levels.

According to the U.S. Bureau of Labor Statistics, wage growth rebounded last December, which will continue to support consumer spending in the short term. However, in the medium to long run, the trend is slowing with U.S. wages growing at 4.1% in 2023, slightly lower than the 4.4% at the start of that year. This means that wage growth may continue to slow throughout 2024 following the moderation in 2023. It will first drive the U.S. economy and then push it down.

Although non-farm payrolls were strong, the total number of employed persons aged 16 and older declined in the fourth quarter of 2023. The figure has been seasonally adjusted, which means it has largely removed the impact of seasonal factors. This indicator declined not only in December, but also in October, leading to a decrease in the overall quarterly figure. This is the second time after the pandemic that U.S. quarterly employment declined. Therefore, to accurately judge the state of the U.S. labor market, the key is to see whether U.S. employment can recover quickly in January 2024.

The U.S. economy will slow down significantly and may even see a recession because since the second half of 2023, the U.S. trade volume has declined. From January to November of 2023, total U.S. imports fell 3.6% from the same period a year earlier, of which the imports of goods fell by 5.0% year-on-year. Excluding the impact of falling prices of imported goods, imports declined by 2.1%; and they declined in most months. Decreasing goods imports indicates that U.S. demand for imported products has reduced, reflecting that the U.S. domestic commodity consumption demand is not strong.

Judging from the data currently available, there is a significant slowdown on the demand side. The short-term rebound is not enough to support the future economy. If high interest rates continue to be maintained, their negative impact may accelerate to transmitting to enterprises and the labor market in the case of debt maturity. In summary, whether the U.S. economy can achieve a"soft landing" will depend on more data. The current situation is not as optimistic as it seems.

European Central Bank officials who until recently had been wary of even discussing interest-rate cuts now look increasingly open to commencing them in June.

Speaking this week in Davos, president Christine Lagarde and several of her colleagues dismissed investor bets on reductions before then. But they signalled the chance of a move around mid-year, when they'll know more about inflation, wages and the stuttering economy, as well as the harm to supply chains by Yemen's Houthi rebels.

Quizzed at Bloomberg House on a summer rate cut, Lagarde described the prospect as "likely." While cautioning that uncertainty remains high and not all indicators are where the ECB would like them to be, her message nudged markets a little and was interpreted as a clear indication of intent.

"The statements came as a bit of a surprise — when the ECB president says something like that, it's like a pre-commitment," said Carsten Brzeski, global head of macro at ING. "After the statements, a rate cut in June seems very likely."

With Thursday marking the start of the weeklong quiet period before the ECB's next policy meeting, there'll be no more rate speak for a few days, and officials may be cagey about offering concrete guidance when they release their statement on Jan 25.

That will leave investors pouring over the latest remarks, which in Lagarde's case included a warning that excessive easing bets could complicate the goal of reaching 2% inflation by loosening financial conditions.

Earlier this week, Bundesbank chief Joachim Nagel said the "summer break" may be an appropriate time to consider a move, having previously called talk on the topic premature.

The effect of their comments on markets was amplified by strong US economic data, alongside an overshoot in UK inflation that prompted traders to soften wagers for rate cuts by the Bank of England.

For the ECB, money markets now lean toward five quarter-point reductions in 2024 instead of the six that were fully priced as recently as last week. They anticipate 136 basis points of easing by year-end with an 80% chance of the first cut coming in April.

That would require an abrupt change of gear in Frankfurt, but such a shift remains possible, according to Denis Lehman, securities chief investment officer at Swiss Life Asset Managers France.

"They're telling us that our bets are too aggressive but it's our job, it's our purpose," he said. "Our position is that the correction will come, and sooner rather than later."

Among ECB officials, though, it's really only Portugal's Mario Centeno who's been vocal about the possibility of acting before the results of early-year wage bargaining are in — likely around May.

And his Austrian counterpart — arch-hawk Robert Holzmann — has warned that rate cuts aren't guaranteed at all this year if tensions such as those gripping the Middle East escalate further.

For the most part, policymakers appeared to be on the same page.

Speaking in Vienna, Lithuania's Gediminas Simkus said he's "less optimistic than markets about rate cuts in March or April," though a move during the course of the year was likely. Slovenia's Bostjan Vasle said it's "absolutely premature to expect the first cuts at the beginning of the second quarter."

That puts the focus firmly on June, when the ECB will unveil new quarterly projections for inflation and economic growth that often underpin key policy decisions.

While inflation sank in 2023, it actually picked up a little in December, albeit for statistical reasons that should prove temporary. Meanwhile, the euro zone continues to flirt with a recession, which could further soothe price pressures if it materializes.

Germany, the region's No 1 economy, revealed this week that annual output in 2023 shrank for the first time since the pandemic, with only a weak rebound likely at best.

Thursday will bring an account of the ECB's last decision, while closely watched surveys of purchasing managers next week will offer a reading on economic activity. Those releases are unlikely to jolt policy, however, with borrowing costs set to be held at 4% and policymakers demanding a much fuller picture before altering course.

Chief economist Philip Lane cautioned at the weekend against "too rapid a recalibration" in rates. With unemployment recently hitting a record low despite the unprecedented tightening he urged patience before the wage figures arrive.

"By our June meeting, we will have those important data," he said.

Sterling emerged as the star performer in today's market, largely driven by surprising inflation data from the UK. CPI inflation in December showed an unexpected acceleration, with core CPI remaining at elevated level. This development led to a swift change in the market's perspective concerning BoE's policy, reducing the anticipated number rate cuts this year from around six to four. Moreover, the probability of the first rate cut in May has drastically reduced from over 80% to approximately 50%.

Meanwhile, Dollar is the second strongest currency, benefitting from prevailing risk-averse sentiment that led to decline in global equities. This cautious market mood has been partly influenced by central bankers who have pushed back against aggressive speculations regarding rate cuts. Euro, reacting to comments from ECB officials at the World Economic Forum in Davos, ranked as the third strongest currency.

On the other end of the spectrum, Swiss Franc found itself as the day's weakest performer, mainly due to from sell-off against Euro and Sterling. Australian Dollar also lingered at the lower end of the performance scale, facing additional pressure due to concerns over China's economic outlook. Japanese Yen trailed not far behind in weakness.

Technically, GBP/AUD's break of 1.9263 resistance should confirm that correction from 1.9967 has completed with three waves down to 1.8685. Outlook will now stay cautiously bullish as long as 55 D EMA (now at 1.9018) holds. Up trend from 1.5925 (2022 low) should be ready to resume through 1.9967 to 61.8% projection of 1.7218 to 1.9967 from 1.8584 at 2.0283.

In Europe, at the time of writing, FTSE is down -1.76%. DAX is down -1.22%. CAC is down -1.36%. UK 10-ear yield is up sharply by 0.1297 at 3.931. Germany 10-year yield is up 0.037 at 2.297. Earlier in Asia, Nikkei fell -0.40%. Hong Kong HSI fell sharply by -3.71%. China Shanghai SSE fell -2.09%. Singapore Strait Times fell -1.34%. Japan 10-year JGB yield rose 0.0113 to 0.609.

US retail sales rose 0.6% mom to USD 709.9B in December, above expectation of 0.4% mom. Ex-auto sales rose 0.4% mom to USD 573.4B, above expectation of 0.2% mom. Ex-gasoline sales rose 0.7% mom to USD 656.7B. Ex-auto, gasoline sales rose 0.6% mom to USD 520.2B.

In an interview at Bloomberg House in Davos, ECB President Christine Lagarde said "it's likely" for a rate cut in the summer, but added that she has to be "reserved". She emphasized ECB's data-dependent approach and acknowledged the prevailing uncertainty and certain indicators that are yet to reach desired levels.

Lagarde expressed concern regarding market expectations for aggressive rate cuts, labeling them as a "distraction" from the ECB's primary goal of combating inflation. She expressed concern that if market anticipations are misaligned with reality, they could hinder ECB's inflation control efforts.

Reiterating the ECB's commitment to achieving sustainable inflation of 2% over the medium term, Lagarde asserted, "We are on the right path, we are directionally towards the 2%, but unless and until we are confident that it is sustainably at 2% — medium term — and we have the data to support it, I'm not going to shout victory."

Eurozone CPI was finalized at 2.9% yoy in December, up from November's 2.4% yoy. CPI core (ex-energy, food, alcohol & tobacco) was finalized at 3.4% yoy, down from prior month's 3.6% yoy. The highest contribution to the annual euro area inflation rate came from services (+1.74 percentage points, pp), followed by food, alcohol & tobacco (+1.21 pp), non-energy industrial goods (+0.66 pp) and energy (-0.68 pp).

EU CPI was finalized at 3.4% yoy, up from November's 3.1%. The lowest annual rates were registered in Denmark (0.4%), Italy and Belgium (both 0.5%). The highest annual rates were recorded in Czechia (7.6%), Romania (7.0%) and Slovakia (6.6%). Compared with November, annual inflation fell in fifteen Member States, remained stable in one and rose in eleven.

UK CPI rose 0.4% mom in December, well above expectation of 0.2% mom. For the 12- month period, CPI accelerated from 3.9% yoy to 4.0% yoy, above expectation of 3.8% yoy. That's the first time the rate has increased since February 2023.

CPI core (excluding energy, food, alcohol and tobacco) was unchanged at 5.1% yoy, above expectation of 4.9% yoy. CPI goods slowed from 2.0% yoy to 1.9% yoy. CPI services rose from 6.3% yoy to 6.4% yoy.

China's GDP grew 5.2% yoy in Q4, an uptick from Q3's 4.9% yoy. For the full year of 2023, the economy also recorded a growth rate of 5.2%. On a quarter-by-quarter basis, GDP growth rate was 1.0% qoq, matched expectation, though this marked a slowdown from the previous quarter's revised 1.5% qoq gain.

In the industrial sector, production rose by 6.8% yoy in December, slightly higher than the previous month's 6.6%, meeting market forecasts. However, retail sales growth decelerated to 7.4% yoy, a drop from November's 10.1% yoy and below the expected 8.1% yoy.

Investment patterns showed a mixed trend. Overall fixed asset investment in 2023 grew by 3.0%, slightly exceeding the 2.9% expectation. Within this category, real estate investment saw a significant drop of -9.6%. Conversely, investment in infrastructure and manufacturing rose by 5.9% and 6.5%, respectively, signaling growth in these areas.

Amidst these economic developments, China faces a demographic challenge as its population fell for the second consecutive year in 2023. Total population decreased by -2.75m to 1.409B, a more rapid decline than in 2022.

EUR/CHF's break of 0.9402 support turned resistance suggests that down trend from 1.0095 has completed at 0.9252 already. Rebound from there is tentatively seen as a corrective move first. Intraday bias is now on the upside for 55 D EMA (now at 0.9451). Sustained break there will target 38.2% retracement of 1.0095 to 0.9252 at 0.9574. On the downside, though, break of 0.9349 minor support will turn bias back to the downside for retesting 0.9252 low instead.

In the bigger picture, medium term outlook remains bearish as long as 0.9683 resistance holds. Current fall from 1.2004 (2018 high) is part of the multi-decade down trend. Another decline is in favor after rebound from 0.9252 completes.

December's labour force figures featured another surprise with regards to employment growth, this time to the downside, collapsing –65.1k (–0.5%) in the month. That compares to Westpac's forecast of +35k and a softer market consensus of +15k. The number of people employed full time declined by -106.6k – largest monthly fall on record outside of the COVID-19 period. Part time employment partly offset this fall, increasing by 41.4k.

In their media release, the ABS noted that "The strength in employment in October and November and the fall in December, reflected changes in the timing of employment growth in the last few months of 2023, compared with earlier years."

The ABS points to shifts in seasonal patterns as an important driver of recent results for employment. A possible explanation for this may be the growing importance of Black Friday Sales in Australia. This has likely meant that employers are hiring extra staff in October and November, instead of December.

In line with the large fall in employment, the employment-to-population ratio also corrected, from an upwardly revised record high 64.7% in October to 64.2% in November, the lowest since May 2022. Similarly, the labour force participation rate moved sharply lower, from an upwardly revised record high of 67.3% in October to 66.8% in November to be broadly in line with the rate seen in September.

Looking through the monthly volatility though, employment growth has been tracking a monthly pace of 0.7% on a three-month rolling basis since September – lower than the pace of 0.9% recorded over the three months to June. This is consistent with a gradual slowing in employment growth and an unemployment rate that has begun to drift upwards into year-end.

The broader picture is of a labour market that is in transition, as softness begins to emerge after a period of historic tightness. Volatility aside, individuals are participating in the labour market at record rates amidst the trifecta of household income pressures – elevated inflation, sharply higher interest rates and an increasing tax burden.

There was little-change to the number of unemployed persons (–0.8k) in November despite the decline in employment (–65.1k). This implied a contraction in the size of the labour force (–66.0k), reflecting that many individuals decided to "exit" the labour force in the month. That resulted in the unemployment rate holding flat at 3.9% in December.

While the unemployment rate has been clearly trending higher over the last six months, it remains very low versus history, speaking to a tight labour market that is gradually easing. So far in this cycle, increases in the unemployment rate were largely a consequence of labour demand not being able to absorb all of the increase in labour supply, as opposed to an increase in layoffs and job losses. We expect that to broadly remain the case, with employment growth slowing as labour demand and supply come back into balance, seeing the unemployment rate continue to drift upwards.

The number of hours worked declined by 0.5% over the month of December but was 1.2% higher than a year ago. There were particularly large monthly falls in Victoria (-0.9%), South Australia (-1.0%), and Tasmania (-0.8%).

The number of hours worked rebounded strongly as the economy opened from COVID-19 induced lockdowns. Employers responded to strong demand and emerging skill shortages by squeezing as many hours as possible from their workforce. This saw the share of full-time employment (those working 35hrs/wk or more) increase to be around 70.3% in March 2023.

As demand softened and skill shortages eased, the share of full-time employment has trended down. In December 2023, it was 68.9%, around 1.2 percentage points lower than a year ago, and trending toward the pre pandemic average of around 68.5%.

This has seen growth in the number of people employed catch up to, and now exceed, growth in the number of hours worked. It has also meant that there has been a fall in average hours worked, which is consistent with the rise in underemployment as more Australians indicate that they would like to work more hours. Average hours worked per employee fell 0.5% in the month and 1.8% in annual terms.

As the supply side of the economy continues to adjust from the COVID-19 shock and demand slows on the back of tighter macroeconomic policy, employers are likely to pull back on demand for labour. Given how tight the labour market has been during this cycle, employers are understandably wary of letting people go. Instead, they are likely to make this adjustment through demanding fewer hours of their employees.

The underemployment rate, which measures the share of employed workers who are willing and able to work more hours, held flat at 6.5% in December. Underemployment has been trending upwards since before the unemployment rate started to do so. It is currently in line with the rate observed in August, which was the highest rate of underemployment since February 2022.

The underutilisation rate, which combines the unemployment and underemployment rates, also remained, at 10.4%.

The youth unemployment rate, which measures the share of unemployed workers between the ages of 15 and 24, fell from 9.7% in November to 9.5% in December. That said, the employment-to-population ratio for this segment has corrected sharply over the course of the year, from 66.5% in January to 63.5% in December. Being a highly elastic group to changes in labour demand, this provides another signal that softness in labour demand is emerging.

Labour market conditions have clearly softened. While shifting seasonality has blurred the signal from the seasonally adjusted data, the underlying trend is clear: demand is slowing, while potential labour supply continues to grow. We are seeing labour demand slow when it comes to growth in employment, but more clearly through the number of hours worked.

As labour demand slows and labour supply increases, we expect employers to continue to adjust the number of hours worked. This has been quite stark when it comes to the share of full-time employment, which has fallen by around 1.2 percentage points compared with a year ago.

The cooling underway in the labour market is expected to continue as we move into 2024. A key risk here is how quickly economic growth is likely to slow. At this stage, we expect the slowing in the economy to be gradual.

But downside risks to growth cannot be ruled out. To date, the labour market has been a safety blanket for households experiencing intense cost of living pressures – the strong labour market has meant unemployed members of households could pick up a job, or employed members could pick up a second job or additional hours. Without this safety blanket, households may be forced to tighten their belts even further.