Jobs corker puts paid to rate cuts

An absolute corker of a labour force release. Employment was up 71,500 in February with full-time employment rising 17,800 and part-time employment rising 53,700. The participation rate rose to 65.3 per cent, while the unemployment rate remained steady at 5.4 per cent, more or less where it has been since September 2012. Over the past year, employment has risen by 197,400.

The strength of the labour market should be enough to lock in the “interest rates on hold message” for a few more months, at least.

While the industry by industry data are not yet available, so we can't see which sectors sparked the employment lift, the better economic news from the job intensive retail and construction sectors suggests the employment gains would be in these areas. 

While the monthly rise is no doubt a quirk, employment will probably fall by 40,000 next month as the quirk is unwound, the labour market remains in good shape. There are grounds for optimism for further trend employment increases with the ANZ job ads series ticking higher in recent months and economic growth looking to accelerate from the mini-slowdown during 2012.

The jobs numbers should also bode well for the government’s budget revenue projections. Strong employment gains should underpin decent income tax receipts, with the bulk of this flowing into 2013-14 given that eight months of 2012-13 have already passed and the pace of job creation in most of that time was less robust. It is also a scenario where the peak in the unemployment rate may be around 5.5 per cent and by the end of 2013 or into 2014, the unemployment rate could be back at 5.0 per cent. it is unambiguously good news.

The Reserve Bank is clearly on hold. That said, it is too early and not all that constructive to talk of interest rate hikes at this stage. Inflation is just too low and while the global economy is recovering strongly, there are some uncertainties.

That said, an interest rate hike could start to be priced into the market before year end. All it would take for the Reserve to deliver that hike would be clear evidence the unemployment rate is on track to break below 5 per cent, a couple of CPI results that point to inflation moving to the upper half of the bank's 2-3 per cent target band and move hard evidence of better economic news in the world economy. Note the March quarter inflation data will be released on April 24, which if high, could fuel the rate hike talk.