In December, the participation rate in Australia was 66.7%, slightly below the anticipated figure of 66.8%. This marks a minor deviation from economic forecasts.
The participation rate reflects the proportion of the working-age population actively involved in the labour force. The December figures indicate a stable yet slightly lower engagement compared to expectations.
December 2025 Labour Market Overview
The December 2025 labour participation rate came in slightly softer than we expected, which suggests the job market is beginning to cool. This single data point reinforces the idea that the intense period of rate hikes seen through 2024 and 2025 may finally be having its desired effect. For us, this signals a potential turning point for the Reserve Bank of Australia’s policy.
This softer labour data aligns with the latest quarterly CPI figures from Q4 2025, which showed headline inflation dropping to 3.5%, a noticeable decline from the 4.1% seen in the prior quarter. As evidence of a slowing economy mounts, the market is increasing its bets on an RBA rate cut before the end of the third quarter this year. We are now pricing in a greater than 60% chance of a cut by September.
Given this outlook, we believe positioning for a weaker Australian dollar is a prudent strategy in the coming weeks. When we look back at 2024, we saw the AUD fall whenever global growth fears combined with expectations of a less aggressive RBA. Selling AUD/USD futures or buying put options on the currency could be effective ways to express this view.
Impact on Equities and Bonds
At the same time, the prospect of lower interest rates should provide a tailwind for Australian equities. The ASX 200 has historically performed well when markets anticipate an easing cycle, as lower borrowing costs boost corporate profits. We anticipate seeing renewed interest in call options on the index, particularly in rate-sensitive sectors like technology and real estate investment trusts.
The most direct response for us should be in the interest rate markets. This labour report solidifies the case for buying Australian government bond futures, as their prices rise when yields fall on expectations of rate cuts. Looking at the three-year bond futures contract, we see it as a primary vehicle for positioning for a more dovish RBA through 2026.
