Just the job for a rates rethink

Today's strong employment data significantly shrinks the chance of a rate cut in March, and it's now conceivable the next Reserve Bank move could be a hike.

Today's unemployment data have shocked financial markets and those economic pundits who have hogged the output of innumerable power stations publishing silly predictions of labour market gloom and economic Armageddon for the Antipodean nation.

Against almost all expectations – with the exception of this correspondent – Australia's unemployment rate has fallen to 5.1 per cent for the second month running on the back of very strong total jobs growth of 46,300 persons and, importantly, an unchanged participation rate.

As UBS's Scott Haslem commented, "The unemployment rate unexpectedly fell 0.14 percentage points to 5.1 per cent, after several months at 5.2 per cent, and down from a recent peak of 5.3 per cent in Aug/Sep last year... Overall, this was an undeniably strong print for the month... the unemployment rate now more clearly looks to be edging back down from its modest rise to 5.3 per cent (from a recent low of 4.9 per cent in April last year).

"...This is clearly a positive for consumer confidence... Further, with the RBA remaining on hold in February and given their expectation of a rise in the unemployment rate to 5.5 per cent by mid year, it seems unlikely they would ease rates from here unless unemployment jumps sharply over coming months or late April's Q1 CPI surprises to the downside."

This data once again reiterates the core resilience and strength of Australia's labour market in contrast to countless hysterical claims to the contrary. It has also well and truly vindicated the RBA's decision to stay rates in February, which this author predicted (The logic behind a rates surprise, February 7).

For the last six months I have sought to highlight the far healthier narrative conveyed by the government's more comprehensive 'dole' data, with both the number of unemployment benefit recipients and the number of job seekers on the dole falling in absolute terms throughout the course of 2011 (and by even more expressed as a share of the total labour market).

A slight uptick in the volatile labour force survey compelled almost the entire economics community to buy into the case for substantial RBA rate cuts. Today's data will cause mayhem for many economists, who will be forced to once again revise their rate projections, and, to a lesser extent, the RBA, which was banking on a gradual increase – rather than a decrease – in the unemployment rate. It is also significant that this data coincides with a ream of other positive domestic and offshore newsflow, including healthy local business conditions, and business and consumer confidence, combined with better-than-anticipated data out of China, India, the US and Europe.

Those hawks inside the Reserve Bank must be scratching their heads wondering – as I have many times here – whether its knee-jerk December rate cut was, in fact, a major policy error pushed by an increasingly dovish RBA board. The newest member of the ostensibly inflation-targeting RBA board, Heather Ridout, curiously told Bloomberg that she was a "dove" and would prefer to foster economic growth over price stability, which is the RBA's explicit priority.

The probabilities of a rate cut in March have now fallen materially. As I have noted here before, it is not totally inconceivable that the next move in interest rates could be up rather than down, although I would emphasise that the RBA will likely remain on hold for some time before it countenances correcting the cash rate.

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