RBA Rate Cut Prospects Under Pressure as Australian Jobs Surge

The Australian labor market’s relentless strength has thrown a wrench into the Reserve Bank of Australia’s (RBA) easing playbook. A jobs surge of 89,000 in April 2025—more than four times consensus expectations—has reignited debates about whether the central bank can afford to cut rates as aggressively as markets anticipate. With unemployment holding at a 50-year low of 4.1%, the RBA faces a crossroads: balance labor market resilience against global uncertainties, or risk losing credibility in its inflation-fighting mandate. For investors, this divergence between market pricing and policy reality presents a high-reward opportunity to bet on RBA hawkishness ahead of the May 20 meeting.

Labor Market Resilience: A Bulwark Against Easing

The April employment report defied all expectations. Not only did full-time jobs jump by 59,500, but participation rates—particularly among women and 35-44-year-olds—hit record highs, signaling a deepening labor force expansion. The employment-to-population ratio, at 64.4%, now sits just 0.1% below its all-time peak. This dynamism has created a conundrum for the RBA: a robust labor market typically fuels wage growth, which could reignite inflation even as headline metrics remain subdued.

Crucially, the RBA’s preferred inflation gauge—the trimmed mean, at 2.9%—now sits within its 2-3% target band. This gives policymakers room to prioritize labor market stability over immediate rate cuts. As RBA Governor Michele Bullock noted, “Tight labor markets can quickly turn into wage-price spirals.” Markets, however, remain fixated on global risks, such as U.S.-China trade tensions and elevated mortgage costs, which have pushed rate-cut probabilities to 96.6% for May.

Market Pricing vs. RBA Reality: A Growing Mismatch

The disconnect is stark. While markets price in a 96.6% chance of a 25bp cut and four reductions by year-end, the RBA’s dual mandate—price stability and full employment—suggests caution. Key data points:

• Wage Growth: The Wage Price Index rose to 3.4% YoY, with award adjustments masking weaker organic growth. A slowdown here could ease inflation pressures.
• Global Trade: Reduced U.S.-China tariffs have slashed input costs, limiting the need for aggressive easing.
• Household Debt: While mortgage interest charges have surged 163% since 2022, households are already adjusting to higher rates.

The market’s obsession with near-term easing overlooks the RBA’s terminal rate forecasts. Analysts at Oxford Economics now see rates bottoming at ~3.1% by end-2025, down from prior expectations of 2.85%. This suggests the RBA will cut less aggressively than priced, creating a short bond opportunity.

Implications for Asset Classes

1. Australian Dollar (AUD): A RBA hold or smaller-than-expected cut could trigger a +1.5% rally in AUD/USD. The pair trades at 0.6650, with resistance at pre-2024 crisis levels (~0.68).
2. Bond Markets: The Australian 10-year yield, currently at 3.85%, could rise to 4.10% if the RBA signals caution. Shorting 10Y futures or buying steepeners (long duration, short front-end) would profit.
3. Equities: Financials (e.g., CBA, ANZ) and mining stocks (e.g., BHP, RIO) benefit from a stronger AUD and stable rates. Avoid consumer discretionary names reliant on cheap credit.

Tactical Bets: Play the Divergence

Investors should position for RBA hawkishness by:
- Shorting Australian bonds: Target the 2025-30 bond futures curve, which prices in excessive easing.
- Going long AUD/USD: Use options to bet on a rise to 0.68 by mid-2025.
- Overweight financials: Banks’ net interest margins expand in a stable-rate environment.

The RBA’s May meeting is a critical inflection point. If it surprises markets with a 25bp hold or signals fewer cuts, the AUD could surge while bonds retreat—a rare asymmetric opportunity in a crowded easing narrative.

Final Call: The jobs surge has weaponized the RBA’s credibility. Ignore the crowd pricing in aggressive cuts; bet on policy restraint. The crosscurrent of labor strength and global risks will reward contrarians.