Employment in the spotlight
If the next move in interest rates is up, not down, a lot will depend on the job market. The Reserve Bank is unlikely to hike rates until it is confident that unemployment has peaked. The RBA may not necessarily expect unemployment to drop markedly, but it will want to be confident that the jobless rate won’t lift markedly in response to a tightening of policy.
Certainly there are early signs that unemployment has peaked. The unemployment rate fell from 6.1 per cent to 5.8 per cent in March and then held steady in April. At the same time, job advertisements have increased for the past four months, in fact lifting by almost 9 per cent over the period. The net number of new businesses created has also been rising strongly.
However the Federal Budget has made consumers less confident, spending has softened and building approvals have shown signs of topping out. Business confidence and conditions may have been affected as a result -- we’ll find out on Tuesday when the latest NAB business survey is released.
Overall, we expect that employment rose by 10,000 in May with the unemployment rate stable at 5.8 per cent.
Interestingly, while these results should encourage, unfortunately many people don’t believe the jobs data. For some, it’s the definition of employment. According to the survey conducted by the Bureau of Statistics, someone is classified as “employed” if they “worked for one hour or more for pay, profit, commission or payment in kind in a job or business, or on a farm (comprising employees, employers and own account workers).”
If it only takes an hour of work for someone to be classified as employed, then that clearly overstates the level of unemployment. Or does it? The same definition has been in place for over 20 years. So if unemployment has been understated, it’s been understated over the entire period.
And one of the best ways to cross-check the jobs data is to use the Census results – a “population” survey rather than a “sample” survey. At the time of the Census on August 9 2011, the proportion of people that reported that they were over 15 years of age, in the workforce and unemployed was 5.6 per cent. The unadjusted monthly unemployment estimate in the Labour Force Survey in August 2011 was 5.1 per cent while the seasonally adjusted estimate was 5.3 per cent. In other words, the results were very close despite numerous differences in the scope and methodology of the two surveys. Bottom line: we can have confidence in the monthly job numbers.
The other indicators
In a number of states and territories there is a holiday on Monday to usher in the week. On Tuesday, the April home loan data is released together with the NAB business survey and job advertisements. Business confidence probably fell in response to the Federal Budget. But the hope is that job ads continued their recovery in May.
On Wednesday the monthly consumer confidence report is released and investors will hope that the economic growth data injects a little more confidence into the mindset of Aussie consumers.
On Thursday, the Reserve Bank releases latest data on credit and debit card lending. And on Friday, the broader lending finance data is released, covering housing, personal, commercial and lease finance.
Overseas: Chinese economic data in focus
In the coming week, Chinese economic data takes centre stage. On Sunday June 9, the May trade figures are released – data that can be readily reconciled by reference to similar trade data published by other major advanced economies. That is, one country’s exports are another country’s imports. Economists are tipping the trade surplus to rise from US$18.5 billion to around US$23 billion in May.
The Chinese inflation figures are published on Tuesday – both producer and consumer prices. Inflationary pressures are well contained at present. And on Friday, Chinese activity indicators for May are published – covering investment, production and retail sales. Little change is expected from the April growth readings.
In the US, the week kicks off with the employment trends report on Monday followed by wholesale sales & inventories on Tuesday together with weekly chain store sales. The monthly Federal Budget is on Wednesday with the usual weekly data on housing finance activity. None of these indicators are important for investors.
Investor interest picks up on Thursday though when retail sales data for May is released. Economists expect sales to have risen by 0.4 per cent in the month after relatively flat results in April.
Also on Thursday the weekly data on jobless claims is issued. The job market continues to improve.
And on Friday in the US, data on producer prices or business inflation is issued together with the early estimates of consumer sentiment for June. Economists are betting on a modest 0.2 per cent lift in core or underlying producer prices.
Sharemarkets, interest rates & the Aussie dollar
The longest period of stable cash rates in Australia was a 19-month period from December 1994 to July 1996. Interest rate markets are betting that fresh records will be set early in 2015. Currently the overnight index swap (OIS) market is broadly tipping stable rates for the next year. Over the next nine months, pricing suggests an 8 per cent chance of a rate cut, while there is a 9 per cent chance of a rate hike in 12 months’ time.