Jobless jump catches market on the hop

The Australian share market defied a global rally that had been spurred on by signs of progress in Europe's debt problems. While local stocks opened in line with a 2.5 per cent rally on Wall Street, they quickly turned negative when the worse-than-expected jobless numbers came out.

The Australian dollar also fell US0.5? shortly after the release of the jobs figures.

The unemployment rate hit a 10-month high in August of 5.3 per cent, up from 5.1 per cent in July, the Australian Bureau of Statistics said yesterday. Nearly 10,000 positions were lost during the month, confounding expectations there would be as many as 10,000 jobs created.

Of most concern, the economy lost 12,600 full-time jobs, underscoring employers' wariness of growth prospects at a time of growing uncertainty about the global economy.

After falling as much as 22 points, Australia's benchmark S&P/ASX200 Index finished up 4.6 points at 4188. Last night the Australian dollar was trading at US105.91?, down from US106.06? a day earlier.

Economists said the central bank might welcome a slight increase to the jobless rate to the extent it eased inflationary pressures that would otherwise incline it to lift lending rates. But a sudden surge in unemployment in coming months would force the RBA to consider a cut to the 4.75 per cent cash rate.

"The August employment numbers show that the economy has slowed into the third quarter and the unemployment rate is trending upwards," the chief economist for HSBC, Paul Bloxham, said.

"The key question now is whether [the unemployment rate] keeps going up or not. If it only shows a modest rise, then rates will remain on hold. If the increase picks up pace, the case will build for a cut."

On Tuesday, the RBA left rates on hold for a ninth consecutive rates meeting as it weighed contending forces on the economy. High commodity prices are spurring a bulge in mining investment while other sectors are squeezed by weak consumer confidence and a flood of imports.

During the wild swings on financial markets last month, investors were certain the RBA would cut the cash rate this month. While that proved to be a wrong bet, they are again pricing in a rate cut by the RBA's next meeting, according to Credit Suisse.

Yesterday's weak jobs numbers reinforced that expectation, with the prospect of a rate reduction now seen as a better than four-in-five chance, up from a 66 per cent chance just before the release of the jobs data.

The St George chief economist, Besa Deda, said a continued rise in unemployment could prompt rate cuts.

Inside

Data might move markets but it's not always reflective of the broader state of the economy.

Elizabeth Knight, Page 8