SCOREBOARD: Hiking in April

The December quarter National Accounts – released last week – showed the Australian economy is growing well above trend and while there is good reason to be cautious about the data, this fast pace does appear to be consistent with the strong rise in employment over the same period. This alone is enough to credibly think we could get an April interest rate hike, particularly as the cash rate is well below average and most lending rates have a way to go before they are normal. I don't think we'll necessarily get one, however (and for arbitrary reasons), unless the Aussie dataflow over the next few weeks – and especially this week – continue to surprise on the strong side.

The employment data on Thursday will be the key. We all know the story so far, employment outcomes have consistently surprised on the upside with just under 200k jobs being created in the five months to January. As a result, the unemployment rate has fallen from 5.8 per cent to 5.3 per cent. You have to go back to 2005 to see something that strong. The big question is whether that kind of pace can be sustained. Looking at the hours worked data is a complete waste of time and gives no insight into what the labour market is doing. In particular it cannot be cited or used as evidence that the labour market is actually weaker than the headline numbers suggest. I discussed this at length last year, but to recap – the fact that the series doesn't distinguish between salary and wage earners reduces its usefulness.

So I think the answer will generally be yes – construction is going to be a key driver of growth this year (resi, non-resi) and the construction sector is labour intensive. That said, I'm looking for a fall this month of 15k. Just note that history says I'm going to be wrong and the median market expectation is for a rise of about 15k (the unemployment rate is forecast to be steady at 5.3 per cent), yet a small moderation would bring growth rates to more consistent with the leading indicators. If there is any confusion about an April hike, maybe, just maybe, the RBA Deputy Governor can clear things up when he speaks on Wednesday at 9am.

Prior to that, NAB's business confidence measures and Westpac's consumer confidence measures will obviously be very important as will home loans (also on Wednesday). Lending has moderated lately as first home buyers reconsider their interest in the market (ebbing benefits and modestly rising interest rates). I'm looking for a rise of 3 per cent which is slightly stronger than the market forecast of 2 per cent.

Across the Tasman, the RBNZ meet and I think this will be an interesting meeting. For the most part, data this year has, if anything, shown why the Bank can afford to hold steady for a bit. The labour market data in Q4 was very weak (the unemployment rate rising to 7.3 per cent from 6.5 per cent in Q3). Wages remain benign and inflation is smack bang in the middle of the band. Against that backdrop, the RBNZ have shown a predisposition against tightening – so I doubt we'll see the RBNZ hike this week.

Nevertheless I think there is scope for them to flag a near-term rate hike in the press release and accompanying statement given confidence has turned sharply – as have dwelling consents. Moreover, the retail environment itself remains ok. I would argue these indicators give a much more accurate depiction of what is in store, especially when Australian economic growth is surging and global growth continues to recover at a solid pace. In contrast, the weaker data is somewhat backward looking. At the very least and resulting from stronger Australian and global growth outcomes, further upward revisions to domestic growth and especially inflation forecasts are likely and I continue to look for a hike in April.

Apart from the RBNZ, Q4 New Zealand manufacturing data is out today (0845) and retail sales Friday. I'm looking for a solid increase in sales ( 0.7 per cent in headline and core).

Looking further abroad the main global dataflow includes a ruin of Chinese data – trade Wednesday, retail sales, industrial production and inflation on Thursday. In the US watch out for retail sales and Michigan confidence on Friday.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.