Market Watch

With the Federal Reverse now in an open ‘tightening’ cycle and the European Central Bank moving to end its bond buying program as early as September, global liquidity is clearly going dry up over the coming 24 months. 

This leaves Australia in an interesting scenario, as we are net importers of capital and this will have the Reserve bank of Australia monitoring parts of the local economy very closely. 

However, like global peers, the RBA is of the view that its next movement in rates is higher, and this was highlighted in Governor Lowe’s speech on Wednesday. 

Here are the key take-outs of that speech and the three conditions the RBA board needs to see to move rates higher:

1. Slack in the labour market – or, to use the Governor’s word, “lessening” the slack. 
2. “Faster wage growth than we are currently experiencing”. 
3. “Reasonable confidence that inflation is picking up to be consistent with the medium-term target”.

Considering the core mandate of the RBA is maintaining inflation, it’s interesting how much emphasis was placed on employment – it is a driver of inflation, as consumption is a powerful inflation lever. 

However, ‘full employment’ is no prerequisite for the RBA, which makes Lowe’s comments all the more interesting. Underutilisation is a sustained problem currently and was seen in this week’s labour force numbers, which I highlight below. However, it’s interesting that the RBA is now using employment as its new economic indicator for its view on economy, which by the way it still views as glass half full. 

Now given the GDP release last week and the business indicators and surveys of the past three months are all signalling that the internal employment sub-sectors in these releases are increasing, one would suggest that the RBA expects the reacceleration in employment growth to filter into actuals in the second-half of this calendar year. 

The market doesn’t believe this idea, and pricing is a long way off seeing ‘full-employment’ filtering through. However, the data does suggest is could be a possibility. 

If this was to materialise, the market is also under-pricing the possibility of the third condition appearing inside the next 12 months. 

If this was to happen, the current estimates around the first movement from the RBA in 20 months and counting would be brought forward. However, this is a ‘wish list’ scenario and I would point out that the RBA is very data dependent on its rates. The data is a long way off from reaching mandate levels, let alone been being sustained at these levels.

Therefore, with employment on the RBA’s mind, it was interesting to watch the employment numbers on Thursday.

Key take-outs

Total employment increased by 12,000 jobs in May, a touch under consensus of19,000. 

Full-time employment fell by 20,600, while part-time employment increased by 32,600.  

The annual growth in employment slowed off the back of the print by 20 basis points (bps) to 2.5 per cent. 

The employment change figures are consistently ‘noisy’ and I would caution reading too much into this release. However, full-time jobs growth does appear to be slowing after last year’s incredible strength last year – the annual rate is now 2.4 per cent, down 40bps.

On the wages and utilisation front, hours worked fell 1.4 per cent in May, offsetting the sharp rise from April. However, looking through the monthly volatility, annual growth sits at 2.7 per cent year-on-year, which is still well above the longer-term average.

The surprise from the read was the unemployment rate, which fell 20bps to 5.4 per cent. This was the largest decline in the unemployment rate since February 2016. However, this can be explained by the decline in participation, which has now fallen 30bps points since its recent post-GFC high. 

Yet the RBA does put a large emphasis on the unemployment rate, as seen in this quote from Deputy Governor Guy Debelle, describing it as: “the most useful single statistic to assess the state of the labour market”. 

In trend terms, the unemployment rate was stable at 5.4 per cent.