Australia services PMI eases to 51.9, jobs cut as prices rise

The survey provides mixed signals for the Australian dollar and interest rates. Weaker activity, job shedding and lower confidence argue against more tightening. However, faster output price inflation, above its long-run average, supports the case for the RBA to remain hawkish. On balance, the inflation component may be more important for rate pricing, limiting the Australian dollar and short-term yields from the weaker activity figures. Fuel costs were again mentioned as a driver of input prices, so the oil price remains a key factor for the RBA's inflation outlook. Upcoming official CPI and labour market data will be monitored to see if they confirm the PMI's signals.

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Earlier report:

• Australian manufacturing PMI slipped to 49.6 as new orders fell for the first time since June

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Australia's services industry continues to expand, but weaker demand, falling employment and rising prices create an uncomfortable combination for the RBA.

Key points:

• The S&P Global Australia Services PMI eased to 51.9 in September from 53.2, a fourth consecutive month of expansion but the slowest in three months.
• The composite PMI fell to 51.3 from 52.7, with growth confined to services as manufacturing contracted further.
• New business grew at its weakest pace in three months, though export orders rose for the first time since April.
• Services employment declined for the first time since May, only the third drop in five years.
• Input cost and output price inflation both accelerated and remained above long-run averages. Business confidence fell to a three-month low.

Australia's services sector expansion eased to a three-month low in September, according to the S&P Global Australia Services PMI report released Monday. Price pressures intensified, and firms cut staff for the first time since May.

The seasonally adjusted Services Business Activity Index slipped to 51.9 from 53.2 in August. The reading stayed above the 50 mark that separates expansion from contraction for a fourth straight month, but indicated the slowest rise in activity in three months. The Composite Output Index, which combines services and manufacturing, dipped to 51.3 from 52.7. Growth was again limited to services as the contraction in factory output deepened.

New business continued to grow across the services sector, but at the softest pace of the current three-month run. Export orders rose for the first time since April, though only marginally, which firms attributed to business development efforts.

Softer demand translated into fewer hires. Service providers reduced headcounts for the first time in four months, citing slower order growth and cost concerns. The decline was marginal, but S&P Global said it was only the third time in five years that services employment has fallen. With staff numbers down while orders still rose, backlogs of work increased for a third month, though only slightly.

The inflation picture moved in the opposite direction. Input costs rose on higher fuel, labour and other expenses, with consumer services reporting the sharpest increases, and firms passed more of those costs on to customers. Both input cost and output price inflation accelerated from August and stayed above their long-run averages.

Business confidence about the next 12 months remained positive but fell to a three-month low, further below its historical average, as some firms expressed concern about the economic outlook.

S&P Global said faster output price inflation across the private sector suggests consumer prices could stay elevated in coming months, which could keep the Reserve Bank of Australia leaning hawkish. Waning confidence and high prices also point to a risk that services growth fades further. That leaves the RBA balancing a softening economy against stubborn inflation.