Australia Unemployment, and First Central Bank to Blink

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Jobs figures are back in focus in Australia after some interesting comments from RBA Governor Lowe a few days back. Of course the RBA is not directly concerned with the employment situation. But the theory is that jobs support consumer demand, which in turn supports prices. With the employment situation expected to turn, especially in Australia’s spring season, does this mean it is time to start considering a change in RBA policy?

The Governor insists it is not, and that policy will be consistent. The point is that market expectations do not seem to match the RBA’s outlook, pricing in more hikes into next year. In his latest speech, Lowe appeared to be trying to temper expectations. One key point insists Australia did not need to follow the Fed’s rate hike higher, citing the employment situation.

What is the employment situation?

Australia has relatively low unemployment, which has contributed to upward pressure on wages. However, wages have not kept pace with rising inflation, meaning the RBA need not worry about a wage-price spiral. With housing prices starting to fall, but exports remaining strong, it is a case that the reserve bank may not feel as much urgency to control the market. A healthy appetite for raw materials from China continued to support the dollar, which in turn puts downward pressure on prices. Given the amount of imports from Australia, this could have a greater impact on reducing inflation than direct monetary policy.

There has been some weakness in employment recently, but this has been seen as a result of lower participation. Increasing labor force participation would be seen as helping the RBA’s goal of lowering prices, as it would help increase output and solve some of the supply-side problems. Therefore, the RBA could be cautious about going above the neutral rate. Lowe did not give a specific range, only simply saying that current policy is “closer.”

What to watch out for

Australian August unemployment rate expected to remain steady at 3.4%, despite the participation rate expected to tick up a couple of decimals to 66.6% from 66.4% previous. Australian firms have been complaining for months that they are having trouble attracting workers back.

The employment change is projected to turn around, and show 35K jobs created compared to -49.9K in July. These figures are seasonally adjusted to account for Australia coming out of the middle of winter. A key sector that has been hit over the past few months has been construction, as home sales and prices have begun to fall.

Possible market reaction

The issue now is whether the RBA will hike another 50bps or just do 25bps at its next meeting in early October. So far, there is a lot of consensus, but the market still seems to be betting on a more hawkish option.

Better jobs numbers would actually give the RBA more room to manoeuvre, and could be interpreted by the market as meaning a tougher hike is more likely. On the other hand, if the labor market does not show the expected rebound, it could shake some of the confidence that policy will be as tight as expected, and weaken the Aussie.

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