Job data sparks about-turn in the rate debate
News that official job figures recorded their strongest growth in 12 years has turned the debate on interest rates from the next cut to the possibility of an interest rate rise.
The figures - 71,500 jobs growth in February - were 61,500 more jobs than the market had expected.
It sent the sharemarket lower as the possibility of two more interest rate cuts evaporated.
The job figures came as a big shock given the constant headlines of companies cutting staff and closing plants and factories.
The most recent was CSR, which said on Monday it would sack 150 staff and close a plant in Sydney as it struggled to compete with cheaper glass imports in the face of a strong Australian dollar and high labour and energy costs.
Indeed, job cuts became a dominant theme of the latest profit season as companies including QBE, BlueScope Steel, Origin Energy, Rio Tinto and Qantas announced significant staff cuts in an attempt to preserve profit margins as sales continue to flatline.
The ABS figures for February prompted some economists to question the robustness of the figures. Goldman Sachs' well-known afternoon report by Richard Coppleson wrote: "So for now I'd say all the cards have been thrown in the air and how they land between now and June will determine whether or not the rate cycle has bottomed or as most expect - today's employment data was really just a 'rogue number' ... As my colleague Simon Greenaway said - 'so just who's employing all these people?' A very good question, Simon ... who ? No one seems to be able to answer that ..."
For some economists the job figures were a defining moment, prompting them to draw a line in the sand and call the worst of the economic softness behind us.
HSBC chief economist Paul Bloxham said in a note: "This is best seen by looking at the unemployment rate, which was steady at 5.4 per cent in February, or the trend numbers, which were also steady; in trend terms, employment rose by 16,000 jobs in February, the unemployment rate was steady at 5.4 per cent and the participation rate was also steady at 65.3 per cent."
The housing market is recovering, house prices are rising, consumer and business sentiment is improving and equity markets are up more than 20 per cent in the past six months, all of which is lifting the country's retirement savings. Not surprisingly, bond yields jumped, which is the market's way of saying it does not believe the Reserve Bank is in the mood to do an easing any time soon.
If unemployment falls below 5 pre cent and inflation starts to rear its head the RBA will start looking at putting up rates.
It is here that the banks will benefit, particularly those with a high exposure to residential lending such as the Commonwealth Bank and the regional banks. When banks didn't pass on the entire official interest rate cuts to customers, those with a relatively higher exposure to mortgages benefited most.
According to BBY banking analyst Brett Le Mesurier, this places regional banks in a strong position for upside, particularly Bendigo and Adelaide Bank.
To put it into perspective, in the six months to December, Bendigo and Adelaide Bank's loan-to-deposit spread increased by 10 basis points as a result of the loan margin increasing 43 basis points relative to the 90-day bank bill rate and the deposit margin increased by 33 basis points over six months. Le Mesurier believes the remainder of this increased loan spread should be earned in the second half of the year.
"The issues regional banks have faced are more severe than the major banks as they have had to consistently worry about the availability of funding from wholesale markets over the past five years, whereas the major banks' main issue has been its cost," he said. "The fact that Bendigo Bank has been able to issue debt in its own name is a sign of the extent of the improvement."
It wasn't long ago that everyone was focusing on the glass half empty, with the Australian economy facing some tough headwinds and the banks trying desperately to find new sources of income growth as the home loan market stalled, bad and doubtful debts were rising and the only way to grow profit was to drive down expenses.
For the regional banks it has been struggle street since the GFC hit as they came up against tough competition from the big banks, weaker demand in personal banking and rising costs of capital.
But that was then. If you believe the latest job figures then followers of the glass-half-empty school are about to be usurped by glass-half-full advocates, which will have major implications for the economy and the sharemarket. If the figures are a one-off and are followed with a few other statistics that aren't too flash, then the interest debate will return to punting on a RBA cut.