Labor market softness deepens
US job openings drop and layoffs rise, reinforcing expectations for Fed cuts. BoE holds but leans dovish. Japan’s LDP wins a historic supermajority, shaping long‑term policy. The RBA surprises with a hawkish pivot and signals scope for another rate hike.
Weekly highlights
Big decline.
Steady
On hold for now.
Clear easing bias remains.
17-month high.
In line with expectations.
Payback from strong November
A hike as we feared
Seasonal noise, or a signal?
US: Labor market softness deepens
Last week, we noted the sharp language used by Governor Waller to justify his dissent in favor of a rate cut at the January meeting. This week’s labor market updates offered the perfect data support for his position, with job openings plunging and layoffs surging.
Job openings dropped by 386k to 6.542 million in December, the third consecutive decline and the lowest level since September 2020. This is below levels that typically prevailed in 2018-19, suggesting a troublesome lack of job creation in the economy. Notably, the pullback was broad-based, encompassing even the previously more resilient small business segment (Figure 1, page 2). As such, it bears close watching, especially in light of the latest layoffs data.
Indeed, layoffs rose notably in January to 108,435, the highest print for any January going back to 2009. Admittedly, layoffs were significantly higher in October and in early 2025 when government sector layoffs surged amid DOGE actions.
Even so, the message is clear: the softening in the labor market is now approaching a more critical juncture, with less cushion remaining before a rise in unemployment occurs. Our call for three Fed cuts this year, starting in April, seem very warranted.
BoE rate cuts: A matter of timing
The Bank of England has kept its policy rate unchanged at 3.75%, matching what markets expected. The committee's 5-4 split vote in favor of holding rates highlights an ongoing divide between members who support easing (doves) and those who prefer tighter policy (hawks). Ramsden and Breeden joined Dhingra and Taylor among the doves.
While the Bank’s statement still signals further rate cuts, it now uses less specific language. The previous wording about rates “continuing on a gradual downward path” was replaced with simply “be reduced further,” dropping the word “gradual” and leaving more room for interpretation. This new phrasing allows for potential rate cuts at either a faster or slower pace than before. The Bank also emphasized that future decisions on the size and timing of rate cuts will depend on economic data, especially inflation trends.
The latest statement notes less concerns about stubborn inflation, though risks remain due to weak demand and a softer labor market. The Bank lowered its growth forecast for 2026 from 1.2% to 0.9% and raised its expected unemployment peak for early next year to 5.3%. Inflation is expected to get close to 2% by the second quarter, helped in part by recent fiscal measures.
The Bank of England’s messaging this week is clearly dovish. Four members wanted immediate rate cuts, and there is a sign that Catherine Mann could soon join them. The main policy points suggest that inflation concerns are easing, making further rate cuts likely, although these decisions will be guided by incoming data. Governor Bailey noted some changes to the inflation outlook were prompted by government policy but stressed that disinflation is happening sooner than previously anticipated.
We continue to maintain that a rate cut is likely in March. Nevertheless, the final decision will depend largely on forthcoming economic indicators, making both March and April viable possibilities. We project that the CPI will decline significantly to approximately 3%, while the unemployment rate is expected to rise notably in the upcoming reports. Should significant progress be demonstrated in both wages and inflation by April, we expect that an additional rate reduction will occur in June, resulting in a policy rate of 3.25% for the year.
Japan: Landslide
Prime Minister Takaichi’s Liberal Democratic Party (LDP) secured a resounding mandate in the Lower House elections held on February 8, winning 316 of the 465 seats. This marks the largest victory in the party’s history, surpassing the previous record of 304 seats set in 1986. Together with its coalition partner, the Japan Innovation Party (JIP), which won 36 seats, the ruling bloc now controls 352 seats—a supermajority that allows the government to pass legislation through the Lower House even without Upper House approval.
The scale of the victory makes the implementation of a two-year sales tax cut on food, a key LDP campaign promise, all but certain. More importantly, with the coalition now positioned to govern until February 2030, policymakers have a rare opportunity to shape Japan’s medium- to long-term economic and fiscal framework. While there is a risk that the food tax cut becomes permanent, the extended political runway also creates scope for more innovative and proactive fiscal management.
Paradoxically, the supermajority may reduce the urgency for an immediate fiscal push. With less political pressure to spend aggressively, the government may be able to temper market concerns around higher borrowing—despite the continuation of the so-called “Takaichi trade,” marked by a sharp equity rally and a steeper JGB yield curve. This restraint could ultimately prove supportive for the Bank of Japan’s policy normalization.
Our base case remains one rate hike this year, but the likelihood of front-loading that move would rise materially if the yen were to weaken sharply.
Australia: Hawkish pivot
The Reserve Bank of Australia (RBA) raised the cash rate by 25 bps last week to 3.85%, becoming the first major central bank—outside Japan—to resume rate hikes following the post-Covid easing cycle, similar to their move in 2009.
Alongside the rate increase, the RBA introduced notable upgrades to its forecasts. Headline CPI is now expected to rise 4.2% in June (trimmed-mean 3.7%), a half a percentage point jump and expected to ease to the mid-point of 2.6% the RBA’s target only by June 2028. The unemployment rate is still expected to hold at 4.3% through December 2026 and only peak modestly at 4.5% in December 2027. The Bank has also raised its estimate of the neutral rate to 3.60% (from 3.10% in October 2025 and 2.7% in May 2025) and now expects productivity growth to average 0.6% y/y.
The Governor’s press conference carried a distinctly hawkish tone, emphasizing stronger demand, tighter supply side constraints, and easier financial conditions. She noted that the “economy is closer to supply capacity than previously thought” and highlighted “years of weak to no productivity growth.” These comments underscore the RBA’s heightened sensitivity to the risk of inflation re-accelerating due to capacity limitations.
Taken together, the forecasts and guidance leave open the possibility of another rate hike later this year—potentially in Q2—if inflation remains elevated during that period. That said, we continue to highlight that monthly inflation data may show a decelerating trend, especially in the key market-services and housing components. However, given the hawkish pivot at this meeting, we are uncertain whether the RBA will fully acknowledge these signals. Unless the labor market deteriorates meaningfully, the Bank appears unlikely to shift its stance. We remain cautious, especially as the rapidly changing US labor market—an important leading indicator for Australia—adds further uncertainty.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.