Jobless rise jolts markets

THE surprise rise in the jobless rate rattled the sharemarket yesterday and sent the dollar lower as investors bet the Reserve Bank would cut its key interest rate to stop the economy losing momentum.

Australian stocks defied a global rally that has been spurred by signs of progress in resolving Europe's debt problems. While the market initially took its lead from a 2.5 per cent rally on Wall Street, it quickly turned negative when the jobless numbers were released. The jobs news also sent the dollar down half a US cent.

The Australian Bureau

of Statistics reported that

the unemployment rate last month hit a 10-month high of 5.3 per cent, up from

5.1 per cent in July. Nearly 10,000 positions were lost in the month, confounding expectations that as many as 10,000 jobs created would be created.

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

The sharemarket benchmark, the S&P/ASX 200 Index, was down

22 points at its lowest, but closed up 4.6 points at 4188.

The dollar ended the Australian session at $US1.0596, little changed from Wednesday's close.

Last night in Europe, however, it had climbed

back to $US1.0636.

European sharemarkets, which rose strongly on Wednesday night, continued their advance last night in anticipation of US President Barack Obama's address to Congress on a $US300 billion ($A283 billion) stimulus plan expected to include tax cuts, infrastructure spending and direct aid to state and local governments.

US Federal Reserve chairman Ben Bernanke is also scheduled to discuss the US economic outlook.

Meanwhile, Australian economists said the Reserve Bank might actually welcome a slight increase in the jobless rate to the extent it eased inflationary pressures that would otherwise incline it to lift lending rates.

However, a sudden surge in unemployment in coming months would force the RBA to consider a cut in the current 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,'' said HSBC chief economist Paul Bloxham.

''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 being squeezed by weak consumer confidence and a flood of imports.

During the height of the wild swings on financial markets last month, investors were certain the RBA would cut the cash rate at this month's meeting. According to Credit Suisse, they are again pricing in a rate cut by the RBA's next meeting.

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.

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

She noted the RBA had already backed off its bias earlier in the year for higher rates.